An Employee Stock Purchase Plan (ESPP) is one of the most valuable benefits a company can offer, giving employees the chance to buy company shares at a discounted price. It can be a powerful tool to increase your investment in the company you work for, but it's important to know how to use it wisely to avoid unnecessary mistakes.
Here are some key points to help you get started:
1. Understand Your Plan - and Ask Questions
Each ESPP has its own terms, including eligibility, discounts, and holding periods. Make sure to review the details. If anything is unclear, reach out to your plan trustee, they can explain specific terms and help clarify the tax implications.
2. How Does Your ESPP Work?
Every month, a portion of your salary is set aside to purchase shares at the end of a defined period (typically 3–12 months).
Example:
You purchase at a 15%discount from the lower price = $85
That means you’ve effectively bought a $200 share for $85 - a strong return from day one.
3. Know the Marginal Tax Rate
If your ESPP is under Section 102 with a trustee, a maximum marginal tax of 62.17% may be withheld:
This is a withholding rate, meaning it's the amount deducted in advance but not necessarily your actual tax liability. If your personal tax rate is lower than the amount withheld, the difference will be refunded: if you’re still employed by the company, the refund will typically be included in your next paycheck; if you’re no longer employed, you’ll need to file a tax return (Form 106) the following year to report your actual liability and receive any refund you’re entitled to.
4. Form 867 - Withholding Certificate
After selling your shares, your trustee will usually issue Form 867 the following year. This document confirms tax withheld on capital gains (if applicable) and is required for tax reporting.
5. Plan Your Sale
Company stock can fluctuate. Holding too much may increase your risk. Selling strategically can help manage exposure and lock in profits.
6. Evaluate the Benefits
When structured well, ESPPs offer strong returns on relatively low-risk contributions. It's worth reviewing how your plan fits into your broader financial strategy.
A Closer Look: ESPP Under Israeli Section 102
There are two primary tax routes:
1. Section 102 With a Trustee
If your ESPP is set up under Section 102 with a trustee, the main advantage is potential tax relief, but the timing of your sale matters.
Sell the shares before holding them for two years under the trustee’s custody? All gains are taxed as employment income, including income tax, social security, and health tax.
Hold the shares for at least two years from the ESPP purchase date?
Then:
• The portion equal to the discount is taxed as employment income.
• Any additional gain is considered capital gain and taxed at 25% (plus surtax if applicable).
Example:
Bought at $100, market value $150, sold at $190 after 2 years:
• $50 taxed as income
• $40 taxed as capital gain
2. Section 102 Without a Trustee
In this plan, income tax is withheld at the end of the offering period, when the shares are transferred to you. The tax applies to the benefit, the difference between the market value at that time and the discounted purchase price you paid.
Any future sale, even one day later, is subject to capital gains tax, but only on the increase beyond that end-of-offering-period value.
Once the shares are transferred, any future sale, whether one day or one year later, results in capital gains tax on the increase above the share value at the end of the offering period.
To conclude, your ESPP can be a powerful way to build investments and benefit from your company's success, but only if you take the time to really understand it. Ask questions, plan your sales, and think of it as one piece of your bigger financial puzzle. It’s not just about getting a discount; it’s about making smarter choices with what you already earn.
If you have any questions on how to optimize your ESPP grants or navigate the tax rules, we are here to assist - contactus@altshare.com
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