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Lesson 8. Exercising Your Options > Paying for the Stock - Pg. 39

Exercising Your Options 39 Your personal financial situation and goals may cause you to arrive at a different strategy. The point is, careful record keeping gives you the information you need to make the right decisions. Paying for the Stock Once you have exercised your options, you need to pay for the stock. Your options agreement or company policy should detail the conditions and terms of payment. In Lesson 7 I mention that this is one of the drawbacks of exercising options. For some option plans, that means cash. A check with the exercise notice is frequently standard procedure. (See the fol- lowing section on withholding.) However, some companies offer alternatives that make exercising options much more convenient for the employee, although usually at a price. Withholding Taxes It's not that the government doesn't trust you, but if you are an employee, your employer is required to withhold taxes from the proceeds of the sale. Plain English Withholding taxes are the same taxes withheld from every paycheck: Social Security, Med- icare, federal and local income taxes. If you are paying for the stock with cash, you also must include enough to cover the withholding taxes. Remember, you create a tax liability when you exercise an NSO. You owe ordinary income taxes on the spread between the exercise price and the fair market price on the day you exercise.