Reporting Employee Stock Purchase Plan Income (ESPP)
An Employee Stock Purchase Plan (ESPP) allows you to purchase your employer's stock at a discounted price. In an ESPP, your employer withholds money from your paychecks for a period before a set purchase date. On the purchase date, the ESPP buys the stock and transfers it to you.
Under a qualified ESPP, you aren't taxed until the ESPP stock is sold. For your ESPP stock to be considered qualified, you must hold it for 2 years after the offering date and 1 year after the exercise or purchase date. You'll need to recognize wage income equal to the lesser of the gain on the stock (amount the stock was sold for minus the discounted purchase price) or the discount portion that you received for the stock on the exercise date. The discount portion is the difference between the fair market value of the stock on the offering date and the amount paid with the ESPP discount.
If the ESPP is nonqualified, you'll have W-2 income recognized (for the discount portion) on the date the ESPP is exercised and capital gain income on the date the shares are sold. In this case, the discount portion is the difference between the fair market value on the exercise date and the amount you paid.
For both qualified and nonqualified ESPPs, your cost basis is what you paid for the stock plus any amount included on your W-2 from exercising the stock. Note that the cost basis on your 1099-B or consolidated 1099 often will not include the W-2 income, so you may need to make an adjustment to your basis to include it.
Make sure your employer included the right amount of income for your ESPP purchases on your W-2. Some employers will include an entry for Form W-2, Box 14 that states "ESPP" in the description and the amount included as income in Box 1 of your W-2. If you aren't sure whether your employer included the income you can contact your payroll department. You may also get a statement with Form 1099-B, consolidated 1099, or Form 3922 that tells you what was included on the W-2 and can help you calculate your basis.
If your employer has not included the correct income for your ESPP stock on your W-2, you can contact your employer to receive a corrected W-2.
Under a qualified ESPP, you aren't taxed until the ESPP stock is sold. For your ESPP stock to be considered qualified, you must hold it for 2 years after the offering date and 1 year after the exercise or purchase date. You'll need to recognize wage income equal to the lesser of the gain on the stock (amount the stock was sold for minus the discounted purchase price) or the discount portion that you received for the stock on the exercise date. The discount portion is the difference between the fair market value of the stock on the offering date and the amount paid with the ESPP discount.
If the ESPP is nonqualified, you'll have W-2 income recognized (for the discount portion) on the date the ESPP is exercised and capital gain income on the date the shares are sold. In this case, the discount portion is the difference between the fair market value on the exercise date and the amount you paid.
For both qualified and nonqualified ESPPs, your cost basis is what you paid for the stock plus any amount included on your W-2 from exercising the stock. Note that the cost basis on your 1099-B or consolidated 1099 often will not include the W-2 income, so you may need to make an adjustment to your basis to include it.
Make sure your employer included the right amount of income for your ESPP purchases on your W-2. Some employers will include an entry for Form W-2, Box 14 that states "ESPP" in the description and the amount included as income in Box 1 of your W-2. If you aren't sure whether your employer included the income you can contact your payroll department. You may also get a statement with Form 1099-B, consolidated 1099, or Form 3922 that tells you what was included on the W-2 and can help you calculate your basis.
If your employer has not included the correct income for your ESPP stock on your W-2, you can contact your employer to receive a corrected W-2.
