Does my company withhold taxes when I exercise my stock options?

Tax withholding is when your company holds back a portion of your paycheck or collects payment from you in order to submit to the government as taxes on your behalf. 

When you file your tax return, you will calculate your actual tax bill against what has been withheld. If your withholding is greater than your tax bill, then you will get a return of cash due to overpayment.

Important: your company’s withholding does not equal your final tax bill

You may be required to make additional payments over the year or when you file your tax return in order to avoid penalties and interest. Read on to learn whether this could apply to you.

Does my company withhold taxes when I exercise my stock options?

Exercising non-qualified stock options (NSOs) will trigger a withholding requirement for your company. When you notify your company that you want to exercise NSOs, your company will send you an estimate of the withholding tax they are required to remit to the government. You will then need to pay the company your exercise cost and the estimated withholding in order to exercise your options.

On the flip side, exercising incentive stock options (ISOs) will not trigger a withholding requirement. Exercising ISOs may or may not generate a tax liability for the individual so the IRS requires you to do that calculation separately when you file your tax return.

Are the taxes withheld equal to my final tax bill?

A common misconception is that your company’s withholding calculation equals your final tax bill. This is not true for either NSOs or ISOs.

Your company is only going to withhold what they are legally required to. Often, this means that the withholding tax you pay to your employer is going to be less than what your final tax bill will amount to.

Ensuring that the government gets paid on time is your responsibility. You will likely be required to make estimated tax payments throughout the year to supplement the withholding, or lack thereof in the case of ISOs. Make sure you are paying your taxes on time to avoid penalties when you file your tax return.

To estimate your exercise tax bill and determine if you need to make additional payments:

• Use the Stock Option Tax Calculator to calculate your estimated tax bill. (It’s free.)
• Compare the final tax bill with the amount of withholding that your company provides. Usually this can be found in your company’s cap table management software or by simply asking your equity team.
• If your estimated tax bill is higher than the required withholding, you may be required to make estimated tax payments throughout the course of the year until you file your tax return. Speak to an equity strategist to ensure that you make timely and accurate payments.