Do I Pay FICA Taxes on Stock Options?

FICA stands for the Federal Insurance Contributions Act and is deducted from each paycheck. The taxes provide funds for Social Security and Medicare. When you receive and exercise stock options from your employer, some of their value might be treated like wages, in which case FICA taxes will apply. It depends on the kind of stock option you receive.

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Two Types of Options

A stock option is a contract that gives you an opportunity to buy shares of stock for a set price, called the exercise price or strike price. You don't have to actually buy the shares. It is your choice whether to do so, which is why they're called "options."

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Employers typically give out two kinds of options: statutory and nonstatutory. Statutory options qualify for special tax treatment and include "incentive" stock options and options granted by an employee stock purchase plan. Incentive stock options are a popular form of employee compensation, reports the IRS, giving employees the right to acquire company stock at a discounted price in the future.

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Nonstatutory options are those that don't qualify for special treatment. They're also called non-qualified options.

Consider also​: Do I Have to Pay Taxes on My Bonus?

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Taxes on Stock Options

The legal distinctions between statutory and nonstatutory options are somewhat technical and are based on such things as who receives the options, how the strike price is set and the rules for exercising the options. Your employer can tell you which kind you have. When it comes to FICA and stock options, the important thing to know is that you do not have to pay FICA taxes on statutory stock options, but you probably will pay them on nonstatutory options.

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Consider also​: How to Calculate Social Security Tax

Taxable Income at Exercise

It makes sense to exercise a stock option only if the strike price is lower than the actual share price of the stock. It would be a costly blunder to exercise an option to buy shares at, say, $10 a share if the stock was selling for only $9. With nonstatutory options, the difference, or "spread," between the strike price and the share price is treated like wage income, and that means you have to pay FICA taxes on it.

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For example, say you have a non statutory option for 1,000 shares with a $10 strike price, and the stock is currently trading at $15 a share. Exercising the option produces taxable income of $5 a share, or $5,000.

Paying the Tax

When you exercise nonstatutory options, you will owe FICA taxes on the spread. As of 2021, the rate is ​6.2 percent​ for Social Security and ​1.45 percent​ for Medicare, for a total of ​7.65 percen​t. This is the same rate you pay on your regular paycheck.

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You'll also have to pay income tax on the spread. If you hold onto the shares and sell them later, any additional profit you make is treated as a capital gain, not ordinary income. No FICA taxes will apply to that portion of your profit.

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