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Non-Qualified Stock Options – How Are They Different?

Non-Qualified Stock Options – How Are They Different?

Will time bring you more money?

Employee stock options come in many forms and, because of the vast variety of option types, it can be very easy to become overwhelmed. Whether it is incentive stock options, restricted stock options, qualified or non-qualified stock options, each has its own set of rules, regulations and tax implications that need to be understood in order to fully capitalize upon the potential value of each option type. Understanding non-qualified stock options can be intimidating but our recent resource video will help get you all the answers you may be looking for.

What are non-qualified stock options?

Non-qualified stock options are a form of stock option that does not become taxable until the exercise date. This form of stock option is much simpler than qualified stock options because they do not meet all Internal Revenue Code requirements. Additionally, a non-qualified stock option can be granted to anyone, not just a company’s employee.

What makes them different?

With non-qualified stock options, the tax implications are what make them differ from other options. There are three crucial aspects to be mindful of when attempting to better understand the realm of non-qualified stock options.

  • Employee pays income tax equal to the difference of the grant price and the fair market value or sale price on the date of exercise. The difference is considered normal and usual taxable income and is treated as such.
  • Non-qualified stock options require taxes to be paid on the actual date of exercise.
  • Federal, state, local, Medicare and social security taxes are typically withheld.

What are some benefits?

This particular form of stock option has multiple and unique benefits including the idea that they can be exercised at any time after they have vested and before the expiration date; this is typically 7 -10 years after grant. Additionally, non-qualified stock options do not need to be held for a certain period of time because since they do not qualify for long-term capital gains.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: Tax Credits

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