To save you from reading too many words about tax, I've presented this final ESPP How-To in a visual / audio form. You can download the presentation here>. But all you need to know about tax when enrolling in your ESPP is in the first two slides. This is what they say:
1. Enrollment: The payroll deduction percentage you choose during Open Enrollment is calculated on pre-tax income but taken after taxes. Therefore:
a. If your salary and bonuses equal $100,000, a 10% contribution percentage will result in a $10,000 investment in the ESPP.
b. You will pay income and payroll taxes on the $10,000 investment, so your take-home pay will be reduced by the $10,000 as well as the tax on the $10,000
2. Purchase Date: The Purchase Date is not a taxable event, so you do not pay taxes at purchase. However, discount on the Purchase Price is a benefit to you from the company, so you will pay taxes on that discount as if it were compensation when you sell or transfer the ESPP stock.
3. Sale of ESPP Stock: If you sell your ESPP stock before the expiration of a 1-2 year Holding Period following the Purchase Date (this early sale is called a Disqualifying Disposition), you are likely to pay more in taxes than if you sell after the Holding Period because:
a. Taxable Income: Your taxable income on a Disqualifying Disposition may be greater than you Gain on Sale and
b. Tax Rates: Your tax rates on your taxable income may be higher because a greater portion of your taxable income is likely to be taxed as Ordinary Income rather than Capital Gains.
Really. That's all you need to know to enroll. But if you want to plan for the sale of your ESPP stock, you can download the presentation here> or watch the slideshow (with audio!) above or at my sweet new youtube channel>.
More in the ESPP How-To Series:
Calendar Your Bets & Play to Win
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