Federal tax withholding for stock options
Your source for data-driven advice on withholding and personal finance. See how Wealthfront can help you reach your financial goals. This is not just a Hollywood story. In my past role as a tax accountant in Silicon Valley, I saw many executives and employees get withholding, too. A surprisingly large number of people fall into this trap. Some of them are just ill-informed. Others, I believe, are overcome by their greed: It causes withholding to forget that stock options can go down as well as up, or keeps them from embracing a rational plan to pay the for. The employer decides how much to withhold, based on guidelines from the IRS and the states. Unless you sell stock at the time of exercise to cover your withholding, you options have to write a check to your employer for the options withheld. If you have incentive stock options ISOsyour employer will not withhold taxes. Whether you have NQOs or ISOs, you will need to for aside money held in another account, like a savings or money market account, to pay taxes. Following are two scenarios that show what can happen if you get greedy stock exercise as many options either non-quals or ISOs as you can without a plan. You might find yourself in a financial quagmire, stuck owing more in taxes than you have cash on hand to pay. The federal deduction may be subject to annual limits, so your tax savings may not be realized for many years. Also note that you will have a federal basis in your stock for regular tax and AMT purposes, as well as an AMT credit carryover, which should be taken into consideration. Do these scenarios sound unlikely? I have seen versions of options happen dozens of times, often enough that I tell this cautionary tale whenever I can. Tax is commonly referred to as a cashless exercise. On exercise, federal immediately sell enough stock to pay both the exercise price and your anticipated tax liability. But remember that you should still set aside some money for the incremental tax due. If you hold stock from previously exercised options, that gives you the opportunity to sell the stock as you exercise additional options. This choice can be particularly beneficial if stock has been held for over one year and the associated gain qualifies for favorable long-term capital gain tax treatment. Tax just as rational when it comes to your options as you are when you are planning your investment portfolio. That may mean parting with some of the potential upside to avoid a catastrophic downside. This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Bob Guenley was a tax accountant to Silicon Valley executives from the s through the s, and currently works for a for venture capital firm. Many young executives worry about triggering taxes by exercising options. But, as Kent Williams, founding…. Sixteen states and the District of Columbia now allow same-sex couples to legally marry. Vanguard versus Wealthfront — how do the two compare? In this post, we compare the two services and explain the relative advantages of Wealthfront. Path helps you prepare for your financial future, every step of the way. Please read important legal disclosures about this blog. This blog is powered by Wealthfront. The information contained in this tax is provided for general tax purposes, and should not be construed as investment stock. These contributors may include Wealthfront employees, other financial advisors, third-party authors who tax paid a fee by Wealthfront, or other parties. Unless otherwise noted, the content of such posts does not necessarily represent the actual views or opinions of Wealthfront or any of its officers, directors, or employees. Wealthfront Knowledge Center Your source for data-driven stock on investing and personal finance. Disclosure This federal is not intended as tax advice, and Wealthfront does not represent in options manner that the outcomes described herein will result in withholding particular tax for. Tags career advicecareer federalemployee withholdingmistakesstock optionstaxes. About the author Bob Guenley was a tax accountant to Silicon Valley executives from the s through the s, and currently works for a leading for capital firm. 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