ISOs – Rules and tax compliance made easy!

ISOs – Incentive Stock Options

ISOs-Rules-and-Tax-Treatment-made-easy-Global-Shares-e1442317548845

Overview

ISOs, or Incentive Stock Options, offer great tax benefits to employees as long as both the administrators and program participants understand the rules and comply with the associated tax requirements.  

ISOs are a common equity compensation benefit for employees in the United States, or employees paying U.S. taxes.  ISOs are used by private companies, pre-IPO companies and are especially popular among start-ups in Silicon Valley.  ISOs are also used by many public companies.

ISOs can provide tax benefits to employees who exercise their options with careful planning.

ISO Rules

Some of the key requirements in administering ISOs include:

  • The $100K rule: No more than $100,000 may be first exercisable in a calendar year. It can be challenging to manage this plan constraint if your plan bases exercisability on vesting, but it becomes far more challenging if your plan allows for ‘early exercise’ or allows participants to exercise shares that have not yet vested.
  • ISOs may only be granted and exercised by employees. There are special rules that apply to terminated employees or employees who have terminated their service due to disability or death.

ISO Tax Treatment

ISO tax treatment can be complicated and employees need to have tools to plan appropriately. There are special company tax reporting requirements for incentive stock option transactions and forms that must be filed with the tax authorities to report specific transaction details. When companies grant Incentive Stock Options they need to be aware of the IRS rules, limits and requirements that need to be followed for the grants to receive special ISO tax treatment for employees.  For example, when employees exercise ISOs, the company is required to give them IRS Form 3921 with information about the ISO exercise by the end of January the following year.

Incentive Stock Options (ISOs) have some great tax benefits for employees as long as they understand the holding period and tax rules. To pay only capital gains tax and avoid any ordinary income, employees need to hold the shares more than two years from the grant date and one year from exercise. They also need to realize that when they hold the shares through the calendar year of exercise they may trigger the alternative minimum tax (AMT)’

– Bruce Brumberg, Editor-in-Chief and Co-Founder, myStockOptions.com and www.myNQDC.com

To read a collection of interesting articles and FAQs on ISOs please visit the ISOs section on www.myStockOptions.com as well as the Tax Center on the site.

ISOs can be a great equity compensation component, but to make the most of this type of program, both the administrators and the program participants need to fully understand them and the rules are that apply to such programs.

The key to success with any equity compensation program is to ensure that the participants can appropriately plan their transactions to maximize their benefits from the program.

ISO Software

Tracking ISOs accurately is a critical component for companies’ accounting and payroll departments to ensure that all criteria for ISOs are being adhered to and fully compliant from tax and administrative perspectives. Global Shares is an equity compensation software provider offering ISO Software. The technology is designed to offer complete control over the granting of ISOs so that ISO tax treatment is correctly applied when participants either exercise their ISOs or sell the shares that came from an ISO exercise. Global Shares ISO Software ensures you track and comply with all the associated ISO rules. Read more here about how Global Shares can assist with yours ISOs.

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Do you have a question for the Global Shares team?

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