Should You Participate In An Employee Stock Purchase Plan (ESPP)?

Getting a competitive salary is important, but prospective employees should look at their employer’s benefits package as part of their compensation.  You are fortunate if you work for a publicly-traded company that offers an employee stock purchase plan (ESPP).

This benefit is a desirable part of your overall compensation package while improving employee retention and motivation.

Employee stock purchase plans may seem technical or intimidating to employees. More employees may participate in the program once there is a better understanding of how ESPPs work and incentives. We have examined the four most common equity compensations, including ESOP, ESPP, ESO, and RSU, in this post here.

What Is An ESPP? An ESPP plan allows employees to buy their company’s stock at a discount price of up to 15% of their salary but no more than $25,000 annually. You can contribute via paychecks, and contributions typically are 1-10% of wages. It is the right way for employees to participate in the success of their company.

A qualified plan has more restrictions but favorable tax treatment, and non-qualified plans have fewer restrictions but less good tax benefits. To implement a qualified ESPP plan, most shareholders must vote to approve it, and all employees must have equal access to the plan.

Favorable Tax Treatment For Qualified Plans As mentioned above, if you are participating in a qualified employee stock purchase plan (ESPP), you may reap the benefits of tax-advantaged treatment. If you sell shares higher than your purchase price, you will have income (rather than a loss).

How The Tax Treatment Works Significantly, the qualifying disposition occurs in the year when the stock was sold and is taxed accordingly. The taxation of income discount from market value is at a higher rate. If you hold the shares short-term, your income from its sale will be treated as ordinary income and treated at a higher tax rate.

Long Term Holding Period For Tax Advantages Most plans allow the employee to immediately sell their shares upon purchase without requiring a vesting or holding period. However, if you sell your shares before the required holding period, your entire income is taxed as ordinary income at a higher rate.

If your employer offers your employee stock purchase plan is a desirable benefit of your compensation plan. Participation in a qualified plan with a discount on the stock market price is a great way to earn incremental income, have tax advantages, and get a psychological boost at work.

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