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William Coughlan, CPA Jun 14, 2023 6 min read

Things to Know About Employee Stock Options

You’ve accepted a new job and Employee Stock Options are a part of the overall compensation package. As the company succeeds and the stock increases in value, you too will benefit. It’s a win-win situation, right? That all depends on how you plan to realize those benefits. 

Without proper planning, when you retire or leave the company, your Employee Stock Options can saddle you with massive tax liabilities that can devastate the overall value of your portfolio. Luckily, with the expertise of a trusted tax advisor, some forward-thinking and advance planning can help guarantee that Employee Stock Options enhance your financial portfolio, rather than hinder it. 

What Are Employee Stock Options? 

Employee Stock Options are an offer by a company giving employees the right to purchase a specified number of shares of stock at an agreed upon price after they vest, or gain the right to acquire that stock. Vesting typically involves a time requirement, often occurring over the course of four to five years. Sometimes, vesting involves a performance component as well.

Restricted stock units. Restricted stock awards. Restricted stock. Non-qualified stock options. Incentive stock options. Employee Stock Options can certainly be complex. Each option has different tax implications when they’re exercised, and companies have the ability to structure their Employee Stock Option plans in a variety of ways. While most employees don’t have the depth of knowledge to decipher how each option can affect an overall financial portfolio, a qualified tax advisor does. That’s why it’s important to enlist the support of a tax professional early on in your career. 

Understanding the Big Picture

You’ve signed your employment contract and you’re officially on board as a new employee. It’s not too early to start looking ahead. In fact, that’s a great time to begin exploring what Employee Stock Options can mean for you. At LTax, our tax advisors create a Stock Option Plan for their clients to summarize their options and frame them within the context of their financial portfolio as a whole. A Stock Option Plan will show the various options, the exercised price of those options, the current value of the stock and the tax implications for exercising those options over a certain number of years. A Stock Option Plan will also offer insight into a variety of scenarios and options for exercising your options. 

Once a Stock Option Plan has been created, it is easy to revisit and tweak each year as necessary. This ensures that when it is time to vest, a plan is in place for maximizing those benefits and making them work within the scope of your complete financial portfolio. 

Common Pitfalls

Preparing for Market Swings

As anyone who invests in the stock market knows, things can change quickly and dramatically. Imagine planning for $10 million in retirement income from your stock portfolio. Suddenly, the market shifts, and your $10 million has swiftly become $3 million. It’s a scenario that happens time and time again. While it’s impossible to control the market, it is possible to plan for a variety of scenarios.

With the help of a tax advisor, you can build some safeguards into your portfolio. Early discus-sions with your financial team, including your financial planner and tax advisor, can ensure that you have a strategy in place for mitigating market swings as much as possible. Discuss whether it makes sense to start selling and diversifying when the market is high, and have a plan in place for when the market is low. Although the ultimate value of your portfolio is lower at this time, it also brings opportunity to exercise options with a lower tax liability. 

Exercising Your Right to Purchase

Employees should receive a vesting schedule from their employer which will show when options vest and when those options can be exercised. However, reaching that time frame alone does not mean you own the stock. In reality, you don’t own the shares until you exercise your options. Additionally, once you retire or leave a company, there is typically a certain amount of time during you which can exercise your stock options before losing them. These common misunderstandings of Employee Stock Options can be costly, and pose another solid argument for enlisting the help of a valued financial planning professional and tax advisor as you navigate your Employee Stock Options. 

A Shared Mindset for Growth – Get in Touch with Us

With a proactive tax partner by your side, you can feel confident that you will maximize your Employee Stock Options and make them work for you.

For more information on how our tax advisors can compile a Stock Option Plan, contact us here or call us at 561.453.1441.

 

 

LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, ​independent engagement agreement with a licensed attorney or tax professional.