Understanding Your Employee Security Options
Many companies offer their employees security options as an added incentive to work at the company. Employees can choose to hold on to these options and exercise them in the future. Let's look at what employee security options are, what you can do with them, and some tax considerations if you received security options at your job.
What is a Security (Stock) Option?
Security stock options give an employee the right to acquire a security of the employer. In other words, employees have the option to buy stock in the company and thereby become a part owner. Often, these security options have defined prices and time horizons and may be issued when an employee is hired or at any time during their employment.1
Most employers will issue their security options under one of three plans: an employee stock purchase plan (ESPP), a stock bonus plan, or a stock option plan.
Employee Stock Purchase Plan
With an ESPP, employees can acquire shares of the company at a discounted price, meaning that they can purchase the shares for less than the value of the stock at the time. Many ESPPs provide a "delay in the acquisition of the shares," meaning "an employee contributes a certain amount over a period of time, and, at pre-specified periods, the employee can purchase shares at a discount using the accumulated contributions."2
Stock Bonus Plan
With a stock bonus plan, an employer gives an employee shares free of charge.
Stock Option Plan
With a stock option plan, employees can purchase shares of the company at a predetermined price.
What Can You Do With Your Employee Security Options?
If you have employee security options, you have a few choices of how to take advantage of those options. Here are two choices:
Cash Out
One choice is to cash out your security options. According to Fidelity, employees can generally sell shares purchased through the employee stock purchase plan at any time. This option has its pros and cons, and meeting with a financial advisor that specializes in ESPPs can help you determine if it's the right one for you.3
Exercise Your Options
The next choice is to exercise your options. When you exercise your options, you are buying shares of the company stock. Although you might already have the stock in your portfolio, they aren't worth any real value until you exercise them. The purchase price will be determined by your contract with your employer.
Lastly, if you leave an employer and can't cash out your options and don't want to exercise them, you can let them expire and not have to pay anything for them (but you also won't make anything, either).
How Your Employee Security Options Are Taxed
Employee security options have unique tax considerations. According to TurboTax, you are taxed on the amount of money you earn on a sale when you sell or exercise your options. For example, if you purchased your employee security options at $10 per share and you sold them for $15 per share, you would be taxed on the $5 difference (gain).3
Were you given the option of purchasing employee security options at your company? Or were you given stocks as a bonus? This type of compensation is becoming more popular as Canada's companies continue to grow.
- https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/financial/security-options/what-a-security-stock-options-taxable-benefit.html
- https://www.fidelity.com/products/stockoptions/faqpurchase.shtml
- https://turbotax.intuit.ca/tips/how-are-security-options-benefits-calculated-and-taxed-6262
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
