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Chapter 15. Shopping at the Company Stor... > Stocking the Shelves with ISOs, NSOs... - Pg. 155

Shopping at the Company Store 155 An NSO is taxed very differently from an ISO. When you exercise your NSO, no matter what the time frame has been, your gain (the difference between the grant price and the sale price) will be recognized as ordinary income immediately. It will actually be included on your W-2, and you will be liable for FICA taxes as well. The company will get a deduction here because the spread between the grant price and the sale price is considered compensation to you. If you hold the shares longer than 18 months and they appreciate in value, you will owe tax on the difference between the price you paid and the new sale price. ESPPs Employee Stock Purchase Plans (ESPPs) are the most popular with employees. These plans allow employees to purchase shares of company stock through payroll deductions using after-tax dollars. They also receive special treatment under the IRS Code, as long as they have been approved by the shareholders of the company. The plans give employees the ability to share in the growth of the company and are meant for the rank-and-file employee. The stock is sold to the employee at a discount, not to exceed 15 percent, and the employee cannot purchase shares that would exceed $25,000 in value in each calendar year. Employees are not taxed when they purchase the stock, only when they sell it. How long the stock is held determines the tax consequences. The Least You Need to Know · You can find bargains at the company store, but like any other purchase you make, you need to do your homework to see what fits your budget. · ESOPs are qualified retirement plans set up by the employer to give the employee ownership as well as retirement benefits.