Nonstatutory Stock Options

Two types of stock options for employees exist--incentive stock options (ISOs), or statutory stock options, and nonstatutory stock options, also known as nonqualified stock options (NSOs). While ISOs are, for the most part, more favorable to an employee, NSOs have their advantages, too. The main difference between the incentive stock option and the nonstatutory stock option is that for one reason or another, that particular stock option does not meet all the necessary requirements to legally qualify as an incentive stock option. Most, if not all, nonstatutory stock options do not have a fair market value at the time of purchase and therefore are taxed at the time of employee purchase; however, if the value of the stock purchase is established (which most are not), it will be taxed to the employee. Also, it should be noted that for an employee holding an NSO with an already determined fair market value, that nonstatutory stock option is not taxable upon its receipt. Another important difference between the two stock options is that Code Section 83 governs the taxing of the NSO. NSOs are also fully transferable. Nonstatutory stock options also do not have to meet any qualification rules, and a company can customize the option to meet the exact needs of its employees. They are especially beneficial to contractors because they can be awarded to them and any other company worker that is not directly employed by the company. Stock shares deemed to be nonstatutory stock options are prearranged so employees that wish to purchase those stock options can do so at a preset price. This way employees can feel as if they are a part of the growth of the company in which they work for. As an employee, it is important to keep in mind that employers that use these type of stock options are aiming to reward employees for their hard work and loyalty by seeking the same benefits for them that qualified stock options supply.

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