Readers might remember that back in February, I decided not to sign up for my employer’s stock purchase plan. Well, I have another chance to sign up because the next intake has just begun!
My company’s Employee Stock Purchase Plan (ESPP) offers the following:
- contributions of between 2 and 10% of your annual salary
- 15% discount on the market price of the stock
Keep in mind, it’s (sadly) not an automatic 15% profit. There’s taxes! Specifically, there is:
- Withholding tax
- Capital Gains (or Loss)
The withholding tax is take directly by your employer. It is calculated by taking the difference between your purchase price and the market value of the stock at the time of purchase and applying your marginal tax rate. In other words, the monetary value of your discount is considered employment income and you are taxed accordingly!
A capital gains tax is the tax on the profit from the sale of assets such as stocks, bonds or property. The rate varies depending on your jurisdiction.
For my ESPP, the withholding tax is basically a non-issue. Since the money is deducted from my paycheque, the tax is no different than the regular income tax that is taken off. I will have to pay the capital gains tax when I sell, but that’s no different from any other stock that I might own.
I’m planning on signing up for the ESPP this time around. I’m going to start with a 2% contribution and as I pay down my student loans and (hopefully) get more raises, I’ll consider increasing it!
Do you participate in any employer investment or savings plans?
