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The main difference between ISOs and NSOs is that ISOs come with no tax liability on exercise, but come with a set of requirements, whereas NSOs come with tax liability on exercise, but do not have the same requirements.
The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.
Non-qualified stock options give employees the right, within a designated timeframe, to buy a set number of shares of their company's shares at a preset price. It may be offered as an alternative form of compensation to workers and also as a means to encourage their loyalty with the company. 1?
The tax catch is that when you exercise the options to purchase stock (but not before), you have taxable income equal to the difference between the stock price set by the option and the market price of the stock. In tax lingo, that's called the compensation element.
qualified stock option (NSO) is a type of stock option used by employers to compensate and incentivize employees. It is also a type of stockbased compensation.
When you exercise an NSO, any spread between the FMV on the date you exercise and the price you are paying for the stock is considered ordinary income to you. Your company will usually withhold ordinary income tax (including federal, payroll and any applicable state taxes).
If you exercise one of these NSOs, you'll pay your company $3 to buy a share. But the IRS views that share to be worth $35. The difference between the $3 and the $35 counts as a $32 phantom gain (also called the spread). The phantom gain is taxed at ordinary income rates.
If you exercised nonqualified stock options (NQSOs) last year, the income you recognized at exercise is reported on your W-2. It appears on the W-2 with other income in: Box 1: Wages, tips, and other compensation. Box 3: Social Security wages (up to the income ceiling)