Your clients and prospects may receive nonqualified stock options (NQSOs) as a company benefit, and look to you for recommendations and point of view.

Did You Know?
NQSOs are only exercisable upon or after vesting. It’s important to remind clients and prospects that they cannot take action before shares vest.

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Key Takeaway

There are 3 ways to exercise NQSOs: Exercise and hold (cash exercise), exercise and sell (same day sale or cashless exercise), or sell to cover. Understand the tax treatment specific to NQSOs to benefit your client in the long run.

Questions to Ask Clients and Prospects

Conversation starters to help gauge their level of understanding, meet them where they are and present the appropriate options.

Question

Do you receive NQSOs as part of your compensation?

Question

Do you receive NQSOs as part of your compensation?

Why Ask This?

NQSOs are an employee stock option that allows someone to buy a set number of shares of the company’s common stock at a set price.

Question

Do you know the vesting schedule for your NQSOs?

Question

Do you know the vesting schedule for your NQSOs?

Why Ask This?

The vesting schedule is determined by the employer and should be outlined in grant documents. As long as your client or prospect is employed by their company or any of its subsidiaries, NQSOs may continue to vest. Your client or prospect can choose when to exercise vested options and how many to exercise.

Question

Do you know when NQSOs are taxed?

Question

Do you know when NQSOs are taxed?

Why Ask This?

The federal income tax treatment of NQSOs will depend on the timing and manner in which they are exercised. Regardless of these facts, your client must pay ordinary income tax on the difference between the grant price and the price at which they exercise the option.

Question

Do you know the main considerations with NQSO taxation?

Question

Do you know the main considerations with NQSO taxation?

Why Ask This?

  • By definition, these options do not “qualify” for deferred payment of ordinary income tax until the shares are sold.
  • Income tax is normally withheld at the supplemental wage rate, but many stock plan administrators do no tax withholding, which may expose your client to an unexpectedly large tax liability following an exercise.
  • You may want to advise clients to set aside some cash for tax time, or include the likely shortfall in their next estimated tax payment.

Next Step

Start by asking your client if they have thought about how they want to exercise their NQSOs.

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The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professional for information concerning their individual situation.