October 7, 2020
By Rahul Iyer
Often, when we start a new job, we get overwhelmed with policies and paperwork. Before you've settled into your team, your inbox is already filling up with emails. Some of these emails will be friendly welcomes, but a lot will be instructions on how to enroll in your employee benefits, like the Employee Stock Purchase Plan. Deciding whether to register can be daunting.
It's not just new employees who ponder this decision, though. Many people don't enroll straight away but decide to later on when they're more settled, sometimes even years down the line. If you fall into either of these camps and are wondering whether you should take advantage of your companies' ESPP, then you're in the right place.
Employee Stock Purchase Plans are typically viewed as a win-win for both the business and employees. Employees get to participate in something that can meaningfully increase their net worth or financial stability. It also means that employees become directly tied to the company's success, which helps companies attract motivated and driven employees. Put simply, employees may work harder to ensure the company's success and thereby increase the value of their stock.
However, despite being considered a win-win, participation in ESPPs is relatively low, with the average plan having 42% employee participation. So, why are so many employees cautious of investing? A lot of it has to do with feeling unsure or unconfident in the plans themselves. Let's work through some of the concerns or confusions people have to answer whether you should participate.
ESPPs allow employees to purchase stock in the company they work for, and often at a discounted price. This discount is typically 5-15% of the market value, making for a substantial discount. If you want to start investing, then taking advantage of your employer's ESPP and the associated discount is a good idea.
Many people are curious about investing in the stock market, but find it intimidating and don't know where to start. ESPPs can be a great way to start investing but without all the uncertainty and guesswork of doing it alone. Enrolling in the ESPP is typically painless and straightforward. It works like this; your company will inform you of your ability to participate and send you the necessary documentation. All you have to do is fill it out and send it back - job done!
When you sell your shares, the income you receive will either be categorized as ordinary income or capital gains. Capital gains are taxed at a lower rate than your regular income, so you can see tax advantages from investing. How much of each type of tax you pay will depend on when you sell the shares. If you sell your shares within two years after the offering date (or one year from the purchase date), this is known as a disqualifying disposition, and the profit will be taxed as regular income. Conversely, if you sell your shares at least two years after the offering date and at least one year after the purchase date, the profits will be classes as long-term capital gains (qualifying disposition).