Employee Stock Options

There are several things you should know about employee stock options, such as they are no longer reserved just for the executive suite. These days, there are a growing number of companies that offer their employees stock options. There are over 10,000,000 employees that are a part of 4,000 plans according to the National Institute of Employee Ownership even after the dot-com crash. Stock options could be quite expensive and can cause to serious financial problems, especially when the time comes to paying taxes on your gains/profits. Employee stock options can be beneficial financially as long as you're careful not to overreach.

A stock option allows you to purchase your company's stock at a certain price over a period of time. There are two common plans that are available: nonqualified stock options and incentive stock options (ISOs). If you go with the ISO, you will be eligible for special tax treatment. For example, all your gains would be taxed at capital rates instead of higher income rates. Nonqualified options however are a bit different and can be given at a discount to the market value of the stock. In addition to that, they can be transferred to charity as well as children.

There are 3 ways that you can exercise your employee stock options. You can either pay cash, borrow cash from a stockbroker, or swap employer stock you currently own. It is a wise idea to keep your options for as long of a time period as you possibly can, which will allow you to maximize your gains. There could also be some reasons for you to exercise early however. If you are overwhelmed on the stock of your company and would like to diversify so that you are in a more safe situation, you should lock it at a low cost basis for options that are nonqualified. Your goal is to try to avoid catapulting into a tax bracket that is higher by waiting.

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Source: http://money.cnn.com/