Employee Stock Purchase Plan

Jump to Section

Need help with a legal contract?

Post Project Now

What Is An ESPP?

An ESPP, or employee stock purchase plan, is a program run by a company that allows participating employees to purchase company stock at a discounted price. Employees then contribute to their plan via payroll deductions. These deductions build up between the offering date and purchase date. The company will use an employee's accumulated funds at the purchase date to buy stock in the company on behalf of employees who participate in the ESPP.

ESPPs are offered as an employment incentive. They give employees a way to share in the growth potential of a company's stock. They also inspire employees to keep working hard so that the stock price moves up.

Advantages of Employee Stock Purchase Plans

ESPPs have a number of advantages for both employers and employees:

  • Discount to purchase stock: Employees can often purchase stock at a 10% to 15% discount from market value. This creates an immediate capital gain when an employee sells the stock.
  • "Look back" provision: Many plans include a provision that allows them to use the lower closing company share price of either the purchase date or offering date. This can have a positive effect on the amount of gain participants receive.
  • Motivates employees: Employees can receive additional compensation that does not directly come out of the company's pocket.
  • Helps build money-saving habits: ESPPs help get participants in the habit of regularly saving money, and all contributions are exempt from Medicare and Social Security tax.
  • Allows employees to sell stock before retirement: This can prevent portfolios from being heavily weighted in terms of company shares.
  • Simplicity: ESPPs are relatively simple for companies to administer and maintain.

How Do Employee Stock Purchase Plans Work?

ESPPs divide into an enrollment period and an offering period:

Enrollment Period of the Employee Stock Purchase Plan

ESPPs start with an upfront enrollment period. During this period, you get to decide the percentage of your paycheck you want deducted to buy company stock at a discount. Typical plans will allow you to contribute up to the lower 15% of your salary or $25,000 per year.

Whether you contribute pre-tax or after tax will depend on your company. Some stock purchase plans have a minimum contribution of 2% of your salary to participate. With the exception of Roth 401(k) plans, ESPP contributions will be withheld from your income after tax (unlike most 401(k) plans).

Offering Period of the Employee Stock Purchase Plan

Most ESPPs have a 12- or 18-month offering period. The offering period is made up of two or three purchase periods of six months each. Offering periods are divided into shorter purchase periods to maximize the value of the benefit you receive.

After you enroll in your company stock purchase plan, your payroll contributions will accrue. This happens until the last day of each purchase period, when your employer purchases company shares on your behalf using the accumulated funds.

Here's some further reading about the benefits of enrolling in an ESPP if you can afford payroll deductions.

ESPPs and Taxes

When you sell stock that you purchase via your employee stock purchase plan will determine how you pay taxes.

When Do You Owe Taxes If You Enroll in an Employee Stock Purchase Plan?

You do not owe taxes when your company buys shares for you. You're just exercising your rights under your employee stock purchasing plan.

An employer is not required to withhold FICA, or Social Security taxes, when an employee exercises the right to purchase stock through an ESPP. The employer is also not required to withhold income tax when the employee disposes of the stock. However, employees still owe certain income tax on any gain they get from selling the stock.

When you sell this stock, the discount you received when you purchased the stock is typically considered additional compensation. You therefore have to pay taxes on that as regular income. There are two scenarios that affect how you are taxed:

  1. You hold the stock for under a year before selling it: Gains in this scenario are considered compensation and taxed following those rules.
  2. You hold the stock for over a year: In this case, any profit you make will be taxed at the lower capital gains rate. This rate is usually lower than in the above situation.

How much of your stock sale price is considered compensation and how much is considered capital gain will depend on whether the stock sale is a disqualifying or qualifying disposition.

Disqualifying Dispositions

Your stock sale is a disqualifying disposition if you sold your stock within two years following the offering date, or one year or less from the purchase date (also known as the exercise).

Your employer will report the bargain element (the difference between exercise price and market price on the exercise date) in this case on the Form W-2. You will need to pay taxes as ordinary income on that amount.

Any additional profit will be considered capital gain. Whether it is short-term or long-term capital gain will depend on how long you held these shares. This information should be reported on Schedule D.

Qualifying Dispositions

Your stock sale is a qualifying disposition if you sold your stock at least two years following the offering date (also known as grant date), and at least one year following the purchase date (exercise).

If this is the case for you, a portion of your profit will be considered compensation income on the Form 1040. The portion of profit is known as the bargain element. It will be taxed at regular rates.

Then, any additional profit you make will be considered long-term capital gain. Long-term capital gain is taxed at a lower rate than compensation income. You will need to report this on Schedule D, Capital Gains and Losses.

Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Qualified vs. Non-Qualified Employee Stock Purchase Plans

An ESPP may be categorized in one of two ways: qualified or non-qualified.

Qualified Plans

Qualified ESPPs  are the most common type of employee stock purchase plan. They have a number of requirements, as these plans must adhere to eligibility criteria as established by the IRS. Requirements include:

  • Shareholders must approve qualified plans before they are implemented
  • All plan participants must have equal rights in the ESPP
  • The offering period cannot be greater than 27 months
  • Stock price discounts cannot exceed 15%

Non-Qualified Plans

Non-qualified ESPPs do not have as many restrictions as qualified ESPPs and are much simpler. Non-qualified plans, however, will not have any tax advantages.

ContractsCounsel Employee Stock Purchase Plan

Image via Unsplash by austindistel

Flexibility in Your Employee Stock Purchase Plan

Your associate stock purchase plan may give you flexibility in a variety of ways. As every plan is unique, it is important to look at your plan document to understand the details specific to you. Some flexible options to look for in your ESPP include:

  • You may be able to modify your contribution during an offering period.
  • You may be able to suspend your enrollment for a certain time period. This means that no further withholdings will be taken out during a suspension. Contributions accrued, however, will still be used to purchase shares when the purchase date arrives.
  • You may be able to withdraw after you enroll. At that time, you would receive your accumulated cash.

Here's an article where you can learn more about employee stock purchase plans, including what questions to ask if you're thinking about enrolling in one.

An employee stock purchase plan can offer great advantages in terms of discounted stocks, tax benefits, and more. If you're an employer considering offering your employees an employee stock purchase plan, you'll have plenty of benefits as well, and it's something to think about if you're starting a business .

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

ContractsCounsel verified
Managing Partner
23 years practicing
Free Consultation

Tim has 20 years of experience representing a wide variety of emerging and established companies in the technology, software, bitcoin and professional services industries. He works directly with his clients’ executives and boards of directors on corporate, intellectual property, and securities law issues. Recently, Tim has advised clients on Series A and Series B financings, corporate structuring, complex video licensing agreements, and structuring new hedge funds. Tim previously served as Forrester Research, Inc.’s General Counsel and Secretary where he was chief legal officer, led the company’s legal group, and managed the company’s legal and regulatory affairs. Tim played an integral role in the company’s initial public offering in 1997 and coordinated its secondary offering in 2000. He directed the legal process in the company’s acquisitions of Giga Information Group, Inc., Fletcher Research and Forit GmbH and oversaw over $125million in transactions. He also managed the company’s intellectual property assets. Tim is admitted to practice in Massachusetts and New York. Tim holds a Juris Doctor degree from the Boston College Law School and a Bachelor of Arts degree from Trinity College

ContractsCounsel verified
Assistant General Counsel
17 years practicing
Free Consultation

Melissa Green joined the American Medical Association (AMA) as an Assistant General Counsel in November 2019. In her role at the AMA, Melissa supports the CPT and Masterfile licensing programs, in addition to supporting the legal needs of the Professional Satisfaction and Practice Sustainability business unit. Prior to arriving at the AMA, Melissa was the Chief Legal Counsel and Privacy Officer at The Chartis Group, a healthcare advisory services and analytics company, headquartered in Chicago, where she was responsible for commercial transactions for Chartis and its wholly owned SaaS company, and also served as the organization’s privacy officer responsible for HIPAA compliance. Melissa started her legal career in Cincinnati, Ohio at the law firm of Frost Brown Todd where she served as an associate in the Corporate department doing healthcare transactions, securities, and general corporate work. In 2007, Melissa transitioned into her first in-house counsel role at GE Aviation. During her time at GE, she had many roles including supporting new engine sales transactions for the Europe/Middle East/Africa region, its Electric Power business located in Dayton, its Engine Services business (supporting the CF34 and CF6 engine lines), and compliance. Upon leaving GE, Melissa had a brief stint at MedStar in Virginia before accepting a full-time position at the University of Maryland Medical System in Baltimore, Maryland in July 2013. Originally from East Lansing, Michigan, Melissa received her bachelor’s graduate from Michigan State University’s – James Madison College and is a graduate of the University of Michigan Law School.

ContractsCounsel verified
40 years practicing
Free Consultation

My Legal career hasfocused on representing businesses (corporations and limited liability companies) as general outside counsel. In this capacity, I have drafted a broad range of legal documents as well as analyzed proposed agreements drafted by the other party's attorney to the agreement for the pupose of determining the risks to which my client would be exposed. I maintained the client's minute book if no one in-house was available for that task. Additionally, if rquested, I served as a general advisor to the client's executive offers and to its Board of Directors.

ContractsCounsel verified
Corporate Attorney
17 years practicing
Free Consultation

Corporate counsel with years of in-house experience working with and reporting to board / executive-level and upper management, along with extensive regional / national law firm background in commercial transactions and contracts, complex commercial litigation, and employment matters. Skilled at executing corporate priorities, driving profitability by implementing goal-oriented processes to achieve revenue and productivity targets, and managing company litigation and outside counsel. Recognized for creating policies and practices to address ethical dilemmas and resolving misconduct.

ContractsCounsel verified
25 years practicing
Free Consultation

Attorney creating plans and strategies to help individuals create, build, protect and pass on wealth.

ContractsCounsel verified
Principal Attorney
23 years practicing
Free Consultation

Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting start ups, small and mid size businesses with their legal needs in the areas of corporate and securities law.

ContractsCounsel verified
35 years practicing
Free Consultation

Jim Slattery most recently served as General Counsel at Regional News Network, a large owner of broadcast television stations. Jim is an experienced attorney with broad-based expertise. He is a seasoned negotiator who has been involved in negotiations as complex as the Olympic Games. Jim spent 18 years as Vice President for Business and Legal Affairs at NBCUniversal. Previously, Jim worked in the media industry in various roles at All American Television. Jim’s success can be attributed to his ability to properly analyze data, manage projects, lead teams, develop creative solutions for complex problems, focus on strategically optimizing assets, manage/allocate risk and collaborate with divergent constituent groups to achieve objectives. Jim received a J.D. and a B.B.A. from the University of Notre Dame.

ContractsCounsel verified
Attorney at Law
1 year practicing
Free Consultation

Retired Dentist transitioned to Law, with a special interest in Commercial Real Estate, Startup businesses, Asset Purchase Agreements, and Employment Contracts. I love to help dentists and physicians with legal issues pertaining to licensing, credentialing, employment, and general business-legal questions.

ContractsCounsel verified
9 years practicing
Free Consultation

I’m an attorney focusing my practice on concierge corporate and intellectual property law for startups and high-growth companies. I also serve as outside General Counsel to several businesses in various sectors. Since founding my practice I've worked with hundreds of clients across a variety of industries. My experience as a former General Counsel of a premier edtech company gives me unique insight into the challenges my clients face and how to resolve them efficiently and cost-effectively.

ContractsCounsel verified
20 years practicing
Free Consultation

The Law Office of George K. Fuiaxis, from the very beginning in 2002, has built a reputation with its clients as an unmatched, diligent, hands on law practice that is always on duty to find the best course of action for its clients. With a supreme pledge of exceptional service to its clients in the areas of Real Estate (Commercial & Residential), Loan Modifications, Intellectual Property, Corporate Law & Business Transactions, Wills, Trusts & Estates, the Law Office of George K. Fuiaxis creates solutions for the many faceted problems faced by its clients. The office represents several various clients, including well known lending institutions, foreign and domestic corporations, sellers and buyers of residential and commercial real estate, residential and commercial landlords and tenants, well known restaurant and business owners, automobile dealerships, airline companies, well known fashion, sports and entertainment industry individuals and corporations, information technology (IT) startups and well known IT companies.

ContractsCounsel verified
Immigration Attorney
4 years practicing
Free Consultation

Mr. Muhammed Uzum represents corporate clients and their employees as well as individuals in all aspects of U.S. immigration, nationality, and consular processes. Mr. Uzum’s core immigration practice focuses on strategizing and filing E-2, E-1, L-1, and EB-5 applications. His area of expertise includes responding to complex H-1B RFEs, PERM Audits, and Appeals. He also advises clients in obtaining employment-based green cards as well as self-petitions through EB-1 and NIW applications. Mr. Uzum also has vast experience in a variety of other non-immigrant visa matters including B-1, F-1, P-3, E-3, and TN filings.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call