Employee Stock Purchase Plans (ESPPs)
An employee stock purchase plan (ESPP)1 is an optional program that allows you to buy shares of your company's stock at a discounted price. You select how much money you'd like to set aside (up to a limit) to purchase the stock, and your employer deducts it from your after-tax paycheck.
Note: This page specifically addresses qualified ESPPs.
Ahead, we'll cover:
- Enrolling in an ESPP
- Participating in an ESPP
- ESPP tax implications
- Cost basis and tax forms
- Common questions about ESPPs
Enrolling in an ESPP
When you're eligible to participate in your company's ESPP, you'll receive an enrollment email from your employer or Schwab prior to your employer's open enrollment period. This email explains the specifics of the plan, including the discount you're being offered and when the shares can be purchased. For more information, check with your HR department or legal group for details on important dates and procedures.
Participating in an ESPP
To participate in an ESPP, select a percentage or dollar amount you'd like to contribute to your plan, similar to a 401(k) or HSA contribution election. That amount will automatically deduct from your after-tax paycheck. The money will be held by your company until the purchase date, at which point the shares will be automatically purchased on your behalf.
ESPP tax implications
The tax treatment of your shares depends on how long you hold them before selling. Depending on this time period, the sale (known as the "disposition") will be classified as either qualified or disqualified:
- Qualified disposition: The sale of ESPP shares after one year of the purchase date and after two years of the grant date (offering date). Qualified dispositions have a more favorable tax benefit.
- Disqualified disposition: The sale of ESPP shares within one year of the purchase date or within two years of the grant date (offering date).
Note: This section refers to U.S. taxation only on a qualified ESPP plan. International tax filers and non-qualified ESPP plan participants may have different obligations.
Cost basis and tax forms
For U.S. participants, when filing your taxes, it's important to be mindful of the cost basis you report. Cost basis is the price you paid for those shares (which is what your broker will likely report) and an adjustment for the amount considered as part of your compensation income when you sell them (usually found on your W-2). Using the correct cost basis ensures that you file correctly and aren't taxed more than the required amount. Refer to this cost basis sheet to help you determine the cost basis on your stock plan transactions so you can file your taxes accurately.
Tax Forms
Those who sold shares will receive IRS Form 1099-B (U.S. only).
Those who purchased shares will also receive the IRS Form 3922 (for U.S. participants in a qualified ESPP plan).
Common questions about ESPPs
Can I make changes to my ESPP contribution rate?
Yes. Changes are usually permitted and can be made during open enrollment periods. Check your plan for specifics.
How do I sell my ESPP shares?
Log in to your Schwab One® brokerage account and select "Equity Awards" from the navigation bar on the Accounts page. Next, select the green Trade button in the upper-right corner or "Sell Shares" in the right-hand navigation (both will take you to the same destination). Enter your order, identifying how many shares from each lot, order type, and timing of the order. Your company may have specific guidelines around when you can sell your shares. Review your company's trading policy for more information.
My plan has a blackout window. What does that mean?
A blackout window is a period of time (typically ahead of earnings season) during which you are prohibited from trading company stock (to prevent the appearance of insider trading). Your blackout window(s) will be listed in the award agreement provided by your employer.
Will I be able to make additional contributions outside of payroll?
No. Your contributions can be made through payroll deduction only.
How do I stop participating in the ESPP?
Log in to your Schwab One® brokerage account and select "Equity Awards" from the navigation bar on the Accounts page. Select "Manage ESPP" in the right-hand navigation. From there, you'll be able to make changes to your election.