Stock Option tax liability?

Question

When cashing in employer granted stock options, how is the tax liability figured? Is it a flat rate or based on your tax bracket? Please, use layman terms as I am not leagalise savy.

Answer 1

The option income is added to your wages for non-qualified options. You pay the option price and the amount needed for the withholding taxes to the employer. This income would be shown in your W-2 for the year that you exercise and then your tax bracket would be based on what your total taxable income is. If this puts you in a higher tax bracket then you pay the higher rate on some of the income.
If they are ISO options you have to decide on electing to include the income portion in your alternative minimum tax calculation. If they are ISO's and you sell the stock early the gain is ordinary income. If they are ISO's and you don't sell the stock early then the gain is long term capital gain taxed at 15%.
You may want to discuss this with a CPA as it can be complicated navigating the rules and on making a decision about when to exercise to maximize your tax result to your benefit.

Answer 2

whilst you're granted a statutory inventory determination under an worker inventory purchase plan or an worker incentive inventory determination (ISO) plan, you in many cases do no longer comprise any quantity on your gross earnings as a effect of the supply or exercising of your determination. despite the fact that, you will possibly be concern to option minimum Tax in the year you exercising an ISO. you have taxable earnings or deductible loss once you sell the inventory you gained by potential of exercising the alternative. You in many cases manage this quantity as a capital earnings or loss. for many nonstatutory strategies, there is not any taxable journey whilst the alternative is granted and the truthful industry fee of the inventory gained on exercising, much less the quantity paid, is secure in earnings whilst the alternative is exercised. in simple terms remember, as answer #a million factors out, in case you haven't got adequate withholding, you will possibly be penalized on the top of the year for the shortfall.