Incentive stock options are now being provided to employees far more often and while these options are typically desirable to most employees, there can often be a certain amount of confusion when it comes to learning how to calculate ISO tax.
For employees who are not well versed in matters such as these, the prospect of sitting down and teaching themselves how to calculate ISO tax might seem daunting. However, it is much simpler than you may have realized and we are more than happy to offer you the tips you need to assist you.
What Do These Stock Options Entail?
An employee who is offered incentive stock options is granted the ability to purchase stock at a price that has already been determined. This price is known as a strike price or an exercise price. As soon as the option is available for the employee to exercise, they can purchased at the predetermined strike price.
While the strike prices are usually set during the same time period when the stock options are guaranteed to the employees, the employees are also given the ability to purchase the stock at the price that was already determined, even when the stock has increased in value from its initial offering.
So What Does This Have To Do With Learning How To Calculate ISO Tax?
When there is a discount in the purchase price, this is called a spread. This relates to the taxation of incentive stock options in two different ways. The spread is what is taxed and any increases or decreases in the stock's value are also taxed.
Income that is derived from an incentive stock option will be taxed for alternative minimum tax purposes, as well as regular income tax. However, this income is not taxed for the purposes of Medicare or Social Security.
What Do I Need To Know To Properly Calculate These Taxes?
There are five necessary pieces of knowledge that go into the calculation of incentive stock option related taxes. You will need to know the following:
The date that the incentive stock options were originally granted to the employees in question, also known as the grant date.
The cost of each stock's shares, which is typically referred to as the strike price.
The date when the option was first exercised. The exercise date is the date when the employee first decides to exercise their option to purchase shares.
The gross amount that the employee has received from the sale of a stock that was offered as an incentive stock option. The selling price is one of the most crucial pieces of information as it relates to taxation.
The date when you chose to sell the stock.
If you have any further confusion regarding the calculation of taxes related to your incentive stock options, be sure to discuss any questions that you have with your employer as soon as possible. They are there to assist you and are more than willing to answer all of your queries in a timely fashion.