While employees can sometimes buy shares of the companies for which they work at a discount through payroll deductions, discounted shares can also be awarded as bonuses or as part of profit-sharing plans meant to make total compensation packages more appealing. Just as with other types of stocks, there are some tax implications you should be aware of related to the purchase and sale of employee shares in company stock.
You don’t generally owe taxes when your company buys shares of its own stock for you. This is the case when you have the payroll department take regular deductions from your paycheck for participation in a stock ownership plan, or when the stocks come as part of a compensation package or bonus.
Tax on Discount
Employees who take payroll deductions are able to purchase stock at a later date, but at the price the stocks were when the payroll deductions began. Similar discounts are available when stocks are purchased for employees as bonuses or other compensation. If you received a discount when you purchased the stock, this discount will be considered to be additional compensation. That means that you have to pay taxes on it like you would for any other regular income based on your specific tax bracket. However, you don’t have to pay these taxes until you sell your shares.
Tax on Gains
The earnings of your shares of stock are also taxed. There are two ways of taxing these, depending on how long you had the shares before selling them. If you held the stock for less than a year before selling, you pay a capital gains tax that is the same as your ordinary income tax rate, which can be as high as 35 percent. If you keep the shares for more than a year, you pay the lower-capital gains tax rate, which for most people is 15 percent as of publication.
Your Tax Obligations
While your employer doesn’t have to withhold taxes when you purchase or sell your shares of company stock, you are required to pay taxes on the discount for which you acquired the shares and on any gains you achieve by selling your shares. The company is, however, required to provide reports to help you or your tax professional determine the discount and gains on which you must pay taxes.
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