What are the tax implications of launching executive share plans in the US?
Options Employees can be granted options with similar tax results to that in the United Kingdom. Non-qualified stock options will normally be subject to income tax (both federal and state) and social security contributions (“FICA”) on the “spread” on exercise. The highest federal tax rate is 35%, while state income tax rates vary from 0% in Texas to 9.3% in California (excluding surtax). Care is needed to grant options with an exercise price that represents “fair market value” to avoid the application of deferred compensation rules briefly discussed below. As in the UK, it is possible to grant tax favourable options. Incentive stock options (“ISOs”) benefit from income tax and FICA relief on exercise and disposals are treated as a capital gain, provided that certain requirements are met, in a similar way to the treatment of UK Revenue approved Company Share Option Plans. However, the use of ISOs is actually declining in the US for a variety of reasons. For example, employees are requir
