An ESPP stands for Employee Stock Purchase Plan. It’s a program offered by many companies that allows employees to purchase company stock at a discounted price, often through payroll deductions.
Employee Stock Purchase Plans could be an important benefit for you. They can create an incentive for employees to increase their ownership stake with their employer.
Here’s how it typically works:
- Eligibility: Employees are usually eligible to participate if they’ve been with the company for a certain period of time.
- Enrollment: Employees can choose to have a portion of their salary deducted on a regular basis (usually a percentage) to buy stock in the company.
- Discount: The company typically offers a discount on the stock price, often between 5-15%. The price is usually based on the stock price at either the beginning or end of the offering period, whichever is lower.
- Purchase: At the end of the offering period, the accumulated funds are used to purchase company stock at the discounted price.
- Holding Period: Some plans may require you to hold the stock for a certain period before selling it, though others allow you to sell immediately after purchase.
The tax impact upon the sale of shares within an ESPP varies based on how long the shares were held and at what price they were sold. The tax treatment depends on whether a sale is a qualifying disposition or a disqualifying disposition.
This flowchart addresses the tax consequences you may face when participating in your ESPP, and maps the tax calculations upon the sale of employer stock acquired through your plan.
If you would like to discuss how this may fit into your overall financial plan, please let us know!