Employee Stok Purchase Plan: The Basics

If you have recently been hired at a large company, you may be offered the option to purchase an Employee Stock Purchase Plan. If you are unfamiliar with this option, don’t worry; it’ s actually quite simple to understand.   

How it Works

Employee stock purchase plans allow you to buy company stock at a discount. This means that you can “share the wealth” if your company does well and even have a role in its overall performance.

You can contribute to this plan in a variety of ways, but the most common way is via payroll deductions. Your employer will simply buy stock for you via these deductions.

Each plan is set up somewhat differently in terms of when and how often stock is purchase, but it is always at a rate lower than market price, which is yet another nice incentive of investing in this way.

You can also sell the stock if you choose to do so, but be aware that selling stock does involve certain tax rules that you will need to know and follow.

Selling Stock

As mentioned above, it is not until you sell the stock that taxes come into play. That’s when things can get a bit tricky.

For example, the discount you enjoyed is considered “compensation” so you have to pay taxes on that discount.

Furthermore, if you fail to keep the stock for at least a year before selling, you will be taxed on any gains. Keeping the stock for more than a year still involves taxes but at a lower rate.

As you can imagine, knowing when and how to sell your stock can be difficult, especially if you are new to investing.

The good news, though, is that you can always seek help from a professional investment adviser. In fact, doing so is smart for anyone doing any kind of investing so that they can enjoy the maximum benefit possible from their investments.