0

I am considering enrolling in my company's ESPP program during the next offering period. The program is non-qualified, and my employer will withhold taxes on the difference between fair market value and the actual purchase price on the last day of the offering (15% discount).

I am offered two options: Share withholding, where a portion of the shares are withheld, and Payroll withholding, where a portion of my next paycheck is withheld.

My question is, do I end up paying more or less taxes by choosing one withholding option over the other, or does it end up the same? Is there any other (monetary) reason for choosing share vs payroll? I plan on selling the shares immediately once they are available (~3 days).

  • Tax rates are independent of withholding methods. – Pete B. Jan 27 '17 at 18:21
  • @PeteB. Yes, the tax rates are the same. But am I taxed on the same amount? I get "more shares" with Payroll withholding, does that make a difference come tax time? With a (small) short-term capital gain or loss in that 3-day window, is it a benefit or loss to choose one method over the other? These are the kind of considerations I'm not sure how to answer, and they all potentially affect taxes even though the rates are the same. – user48207 Jan 27 '17 at 18:35
2

Note that you're asking about withholding, not about taxing. Withholding doesn't mean this is exactly the tax you'll pay: it means they're withholding a certain amount to make sure you pay taxes on it, but the tax bill at the end of the year is the same regardless of how you choose to do the withholding. Your tax bill may be higher or lower than the withholding amount.

As far as tax rate, that will be the same regardless - you're just moving the money from one place to the other.

The only difference would be that your tax is based on total shares under the plan - meaning that if you buy 1k shares, for example, at $10, so $1,500 discounted income, if you go the payroll route you get (say) $375 withheld. If you go the share route, you either get $375 worth of stock (so 38 shares) withheld (and then you would lose out on selling that stock, meaning you don't get quite as much out of it at the end) or you would ask them to actually buy rather more shares to make up for it, meaning you'd have a slightly higher total gain. That would involve a slightly higher tax at the end of it, of course.

Option 1: Buy and then sell $10000 worth, share-based withholding. Assuming 15% profit, and $10/share at both points, then buy/sell 1000 shares, $1500 in profit to take into account, 38 shares' worth (=$380) withheld. You put in $8500, you get back $9620, net $1120.

Option 2: Buy and then sell $13500 worth, share based withholding. Same assumptions. You make about $2000 in pre-tax profit, meaning you owe about $500 in tax withholding. Put in $11475, get back $13000, net $1525. Owe 35% more tax at the end of the year, but you have the full $1500 to spend on whatever you are doing with it.

Option 3: Buy and then sell $1000 worth, paycheck withholding. You get the full $10000-$8500 = $1500 up front, but your next paycheck is $375 lighter. Same taxes as Option 1 at the end of the year.

  • "and then you would lose out on selling that stock, meaning you don't get quite as much out of it at the end" Does that mean regardless of taxation, the Share method is less profitable? I do not have the option of asking them to purchase additional shares (1040 in your example). – user48207 Jan 27 '17 at 19:15
  • 2
    No, what I mean is, if you go into this thinking " I need $1500 out of this", you need to buy/sell more than $1500 (rather, more than $10k in shares) since a few hundred dollars will be withheld. If you go the other route, you get your $1500, but you have that few hundred withheld from your next paycheck. On the other hand, if you're just buying/selling whatever you're allowed or can afford, then it's a wash. – Joe Jan 27 '17 at 19:21
  • Added explanation of the choices. – Joe Jan 27 '17 at 19:29

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.