LEARN | Nonqualified Stock Options: Incentive Compensation

Why Ask This?

NQSOs are an employee stock option that allows someone to buy a set number of shares of the company’s common stock at a set price.

Why Ask This?

The vesting schedule is determined by the employer and should be outlined in grant documents. As long as your client or prospect is employed by their company or any of its subsidiaries, NQSOs may continue to vest. Your client or prospect can choose when to exercise vested options and how many to exercise.

Why Ask This?

The federal income tax treatment of NQSOs will depend on the timing and manner in which they are exercised. Regardless of these facts, your client must pay ordinary income tax on the difference between the grant price and the price at which they exercise the option.

Why Ask This?

• By definition, these options do not “qualify” for deferred payment of ordinary income tax until the shares are sold.
• Income tax is normally withheld at the supplemental wage rate, but many stock plan administrators do no tax withholding, which may expose your client to an unexpectedly large tax liability following an exercise.
• You may want to advise clients to set aside some cash for tax time, or include the likely shortfall in their next estimated tax payment.