This is the second in a four-part series about your paycheck – what the various deductions mean, why you need to pay attention to them, tips on not having too much or too little deducted, and how to use all that information in your financial planning.
In Part 1 I talked about the basic deductions that appear on most people’s pay stubs.
In Part 2 I’ll cover some deductions that are specific to people with stock options. If you’re in the tech industry, chances are your employer has made stock options, in one form or another, a part of your total compensation plan. These come with their own set of pay stub notations that deserve some explaining.
Stock options typically come in three flavors: Incentive Stock Options (ISOs), Nonqualified Stock Options (NSO or NQ), or Restricted Stock Units (RSUs). Your employer may also have an Employee Stock Purchase Plan (ESPP). If you need a refresher on the various types of stock options, check out Landon Loveall’s article, Stock Options: What to Sell and When, or The Definitive Guide to Restricted Stock Units.
Here’s what you may see on your pay stub and what it means.
Dsq Disp is short for Disqualifying disposition and refers to selling ISO or ESPP shares before satisfying the long-term capital gain holding period. The gain on the sale of these shares appears in the earnings section in order to be taxed.
NQ Stk options are non-qualified stock options. Income from NQs is the difference between the value of the stock and your exercise price on the date you exercise. You are taxed on this amount at the time you exercise NQs whether you sell the shares or hold them.
RSU stock income will appear on your pay stub on the date the RSUs vest. The amount is the value of the stock times the number of shares on the vesting date. Your employer will sell some of the RSUs at the time of vesting and apply the amount sold to income and payroll taxes. The amount of income tax withheld is included on the Federal income tax deductions line and the CA income tax deduction line.
NOTE: Your employer may withhold at a lower tax bracket than you are in. Here’s where you need to pay attention, so you don’t get into trouble by NOT withholding enough and having to pay additional tax when you file your return.
In the deductions section you may see NQ Offset, ESPP Offset, ISO Offset or RSU Offset. These are deductions since you are not receiving cash in your net pay from these transactions. You received the cash in your brokerage account where you sold the shares.
Stock options can be an advantage in helping you build wealth and reach your financial goals…if you manage the timing and relevant tax obligations correctly.
That’s where we come in. Give us a call and let’s get planning.