Employee Stock Purchase Plan (ESPP)
An Employee Stock Purchase Plan (ESPP) is a company-sponsored program that enables employees to purchase shares of their employer’s stock at a discount through payroll deductions.
How does an ESPP work?
Companies set enrollment periods that often begin with a new pay period during which employees can sign up. A set percentage of each paycheck is automatically deducted and deposited into a separate account. At the end of the purchase period, the company uses these funds to buy shares at a discounted price for participating employees.
Are ESPP shares taxable?
Taxation of ESPP shares depends on how long you hold them before selling. If you sell within two years of the offering date or one year of the purchase date, the discount is taxed as ordinary income and may be subject to payroll taxes. Holding the shares for a longer period may result in part of the gain being taxed as a long-term capital gain, which is subject to different tax rates than ordinary income.
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