What are Employee Stock Purchase Plans (ESPP)?
An employee stock purchase plan is an option granted by the employee’s corporation that enables employees to purchase shares in the company stock, usually at a discount to the fair market value (FMV) of the stock. Shares are purchased affixed intervals, known as offering periods, which is typically completed through taxable payroll deductions. At the end of your company’s offering period, your accumulated funds purchase shares that can be up to a15% discount. This discounted price, known as the offer or grant price, gives participating employees potentially an instant gain at the time of purchase. The purchase date is a pre-determined date and is at the end of the offering period. The purchase price is the lower of the FMV at the offering date and purchase date. Not all ESPP programs are the same as the structure may vary by company, but the annual purchasing limits are the same with up to$25,000 in purchases.
What are the benefits of ESPP?
ESPP programs give employees the option to invest in their company systematically through payroll deductions and can be an exciting opportunity to purchase stock in your company at a discounted price. It can potentially be away to build wealth and save toward your financial goals.
What are the tax implications?
The type of taxes you owe depends on the type of plan offered by your employee. For tax-qualified ESPPs, known as Section 423 ESPPs, it will depend on the timing of when you purchase and when you sell your ESPP shares. With qualified Section423 plans, a portion of your gain may be taxed as capital gains or as ordinary income, depending on the holding period. Specifically, you may receive preferential tax treatment on your shares at sale if you sell them more than a year from the purchase date and more than two years from the offering date. A disqualifying disposition is when the holding period is not met.
For nonqualified employee stock purchase plans, the difference between the fair market value of the stock and the amount you paid is treated and taxed as ordinary income and tax is owed on the purchase. Consider consulting your accountant on any tax implications and tax related strategies.
How can participating in an ESPP help me reach my financial goals?
Employee stock purchase plans can be a useful tool in your financial toolbox to help you achieve your financial goals. It is a unique way to invest in your company, to systematically save, and if the stock price appreciates over time, they can become a valuable way to build wealth. However, there are no guarantees of future returns and that the stock price will grow, so coming up with a financial game plan is essential to mitigate risk and to help protect your personal financial goals. Consider speaking to a financial advisor and/or a tax professional when it comes to ESPP.
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