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Employee Stock Options & RSUs
Learn about your employee stock options (ESOs, NQSOs, ISOs) and Restricted Stock Units.
Structure: Option Contract (Right to purchase shares for a set price)
Timing: Employee chooses when to buy shares.
Vesting: Subject to schedules
Tax Type: Ordinary income tax and payroll tax usually upon exercise
Price: Exercise Price x No., limit of $100,000 per year
Taxable Amount: Gains from exercise (withholding)
Subject to AMT: No
Exit company: You must exercise or lose in most cases
Structure: Option Contract (Right to purchase shares for a set price)
Timing: Employee chooses when to buy shares.
Vesting: Yes, and holding period
Tax Type: Capital gains tax usually upon sale of stock*
Price: Exercise Price x No., no annual limit
Taxable Amount: Gains from exercise (no withholding)
Subject to AMT: Yes
Exit company: You must exercise or lose in most cases (within 3 months to be Qualified for CGT)
*Note Holding Requirements
Structure: Stock Units (Offered as a form of equity compensation)
Timing: Shares are transferred when granted
Vesting: Subject to schedules
Tax Type: Ordinary income tax and payroll tax when granted
Price: None
Taxable Amount: Value of shares when vested
Subject to AMT: No
Exit company: You keep vested portion
ESOs Timing Step by Step
Timing is key, and knowing the relevant steps can help to maximize outcomes.
Options: Step by Step Process
Business owners in Oregon can offer their employees stock options as a part of their compensation package. Employees can choose to accept stock options when they are granted, but do not have to.
Oregon business owners can incentive good performance or encourage retainment of key employees by creating "vesting periods" where employees earn the right to exercise stock options, involving a timeframe and stay period. The vesting period has a "cliff" of one year, meaning that after that time, you will begin to have you stock vest on a monthly or quarterly basis.
Once the Oregon employee has met the criteria of the employer and the vesting schedule they could then "exercise" (buy shares at the predetermined price) their option contracts. This usually only makes sense if the exercise price is lower than the current market price.
Tax treatment depends on many factors including the type of options (ISOs or NQSO), hold length, if the fair market value can readily be determined, or if the stock resulted in a capital gain or not.
How this process compares with RSUs
*Other stock options may be subject to AMT, and could have different tax implications.
Oregon Employer Considerations
Offering the right equity compensation package can be beneficial to both you and your employees.
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NQSOs can be a better choice for early-stage companies that have a high potential for growth and a compelling company vision that employees can buy into. NQSOs can be more flexible than other types of equity compensation, as they can be structured in a variety of ways.
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However, NQSOs can be complex and are only valuable as an incentive if the employees understand their value potential.
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Since ISOs are considered a more tax-favored form of employee stock as compared to Non-Qualified Stock Options (NSOs) they are a good fit to incentivize sophisticated employees looking to be as tax efficient as possible.
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However, ISOs have strict eligibility requirements, including a limit on the amount of stock that can be granted to an employee in a given year. ISOs, can also be complex and require planning to avoid triggering the AMT.
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RSUs are simpler than other types of equity compensation, since they do not require the employee to make a purchase or worry about timing. RSUs initially have intrinsic value as the value of the stock is determined at the time of vesting. This provides a more tangible incentive for employees that don't necessarily expect the company to grow in the future.
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However, since RSUs may not be considered as tax-advantaged as other types of equity compensation it may be not be as appealing to tax-savvy employees.
Oregon Employee Considerations
Complex, but key considerations for taxes in the state of Oregon.
Beware the Alternative Minimum Tax (AMT)?
The AMT is a parallel tax system that operates in the shadow of the regular tax system, expanding the amount of income that is taxed by adding items that are not normally taxed and disallowing many deductions under the regular tax system.
It can be triggered by:
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Employee stock options
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Unemployment compensation
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Prize or award money
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Claimable deductions
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Self-employment tax
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Qualified retirement plans
and more...
Statutory Stock Options (ISOs)
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Generally, you do not include any amount in your gross income when you receive or exercise a statutory stock option. You may be subject to AMT in the year that you exercise an ISO.
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If you exercise and then sell the stock, you generally will treat the sale amount as a capital gain or loss. If you did not benefit from long-term CGT or other forms of special holding period requirement, you will have to treat income from the sale as ordinary income.
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Oregon taxes nonresidents on their gains or distributions and allows losses from Oregon
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All ordinary income from the state of Oregon will be taxed at Oregon's state income rate.
https://www.irs.gov/taxtopics/tc427
https://www.oregon.gov/dor/programs/individuals/pages/what-form.aspx
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Income from an NQSO with a readily ascertainable fair market value must be reported for federal income tax purposes.
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Nonresidents that are granted an NSO in Oregon must report the income under IRC Section 83(a) as compensation income, or must elect under IRC Section 83(b) to report the value of the option as of the date the option was granted.
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If you work in-and-out of Oregon, you must allocate the income report proportionate to the time worked in Oregon, and time worked out of Oregon.
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Generally, Oregon will not tax the subsequent gain or loss on the sale of the stock unless the stock has acquired a business situs in Oregon
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As of 2023, Oregon has a state Capital Gains Tax (CGT) up to 9.9%
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Generally, short-term CGT can range from 10% to 37% depending on income, and long-term CGT can range from 0% to 20%, also depending on income
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This can combine together to be a sizable portion taken off of your stock option after selling, which is why it is important to recognize the timing and conditions of sale
Section 1202
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Section 1202 of the Internal Revenue Code allows holders of Qualified Small Business Stock (QSBS) to exclude 50% to 100% of capital gains on the sale of QSBS, and Oregon follows the section 1202 100% tax exclusion on capital gains from the sale of QSBS
A Eugene Oregon Example
Imagine two employees that work at a tech start-up in Eugene are offered an equity compensation package, but have concerns about the tax implications in Oregon and wonder if the AMT applies...
Let's say these two employees, named Sarah and Marie, are offered an ISO that will be vested over four years, with a readily ascertainable fair market value.
Four years go by, with Sarah and Marie realizing that they now have the option to exercise their stock options, and decide to contact a financial adviser to discuss the tax implications. They learn that the "phantom gains" that come from exercising the ISOs count toward the AMT calculation, but not the regular Oregon income tax; further, they learn that they must pay the highest bill between these two. After more conversation, the adviser suggests that Sarah and Marie should consider waiting for a year where the AMT is reduced, selling the stock on a year where they have less income, and deciding whether they should wait a full year for Capital Gains Tax or not. Besides the tax implications of Oregon, they were also happy to consider their own personal goals alongside the company, and also considered financing their options exercise to cover the AMT, which could save money later on and leave them with flexibility in case they want to leave their company before an IPO.
Sarah and Marie were pleased to have met with a financial advisor, because their situation may not have been the same as another person's.