Employers often compensate employees with benefits other than just a pay check. Stock options and stock purchase plans are becoming increasingly popular. Here are some of the more common employee stock options and plans, and the necessary tax reporting forms, to make tax time less stressful. This voluntary program, provided through your employer, allows you to make payroll contributions to be used to purchase company stock at a discount.

Generally there is an offering period in which the employee can make contributions for this program. Based upon how long the employee holds the stock, the discount is considered ordinary income and included on Form W-2 by the employer nonqualifying position or it is considered capital gain income and accounted for at the time of sale qualifying position.

For nonqualifying positions , your adjusted cost basis is the compensation income reported on Form W-2 plus your acquisition cost.

For qualifying positions , your cost basis is simply the acquisition cost allowing the discount received to be reported as a capital gain instead of ordinary income. These stock units are awarded to an employee as a form of compensation. The employee does not receive the stock at the time of the award, but has a specific vesting plan outlining when the employee will receive the stock.

At the time the stock vests, the employee receives the units and the fair market value FMV of the stock received on that date is considered income.

The amount reported to you as income on Form W-2 by your employer at the time the stock vests will then be your adjusted cost basis in these stock units.

ISO units must be held for at least one year after the options are exercised. In addition, you cannot sell the shares until at least two years after the options are awarded to you.

For these reasons, any discount you receive by purchasing these options are taxed as a long-term capital gain , which yields a lower tax rate than ordinary income. While ISO units are more restrictive, NSO units are more general.

When these options are granted, they are granted at a predetermined price. When option is exercised, the employee has ordinary income for the difference between the price they pay grant price and the fair market value FMV on the date they purchased the stock exercise price. If you have any compensation income from your employer in the current year, this income is included on Form W-2 in Box 1.

Exercising Nonqualified Stock Options

You should review Boxes 12 and 14, as this will explain any income included on your Form W-2 related to your employee stock options. You will receive a Form B in the year you sell the stock units. The form reports any capital gain or loss resulting from the transaction on your tax return. You should review your investment records to verify the cost basis amount on Form B. The cost basis on your Form B is based on information available to your brokerage.

If the information available is incomplete, your cost basis amount may be incorrect. If your cost basis amount on Form B does not match your adjusted cost basis based on your records, enter an adjustment code B in TaxACT. If your Form B is missing a cost basis amount, you must still calculate and report your cost basis on your tax return.

Form is issued for incentive stock options in the year they are transferred to the employee.

This form includes the necessary information to properly report the sale of these units when you do decide to sell them in the future. Since you have not sold the stock, the holding period requirements have not been determined.

Therefore, the employer does not include compensation income on your Form W-2 as ordinary income. Form is issued to you for your future use when you do sell the units and need to report the income on your tax return.

Form INT

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Your Complete Guide to Employee Stock Options and Tax Reporting Forms by TaxAct 1 Comment. Employee stock options and plans Employee Stock Purchase Plans ESPP This voluntary program, provided through your employer, allows you to make payroll contributions to be used to purchase company stock at a discount.

Restricted Stock Units RSU These stock units are awarded to an employee as a form of compensation. Incentive Stock Options ISO The requirements for ISO units are stricter and in turn provide more favorable tax treatment.

Nonqualified Stock Options NSO While ISO units are more restrictive, NSO units are more general. Tax Reporting Forms Form W-2 If you have any compensation income from your employer in the current year, this income is included on Form W-2 in Box 1. If you sold any stock units to cover taxes, this information is included on Form W-2 as well.

Form B You will receive a Form B in the year you sell the stock units. Form Form is issued for incentive stock options in the year they are transferred to the employee. Form Form is issued for employee stock options that you purchased but do not sell. Like Form , save Form s with your investment records. TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund.

Form Misc

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How Incentive Stock Options are Taxed

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