Glossary
Equity compensation, defined
Every term explained in everyday words, with an example, why it matters, and common mistakes. No tax background needed.
52 termsEducational, not tax advice
A
- AMT CreditAn AMT Credit is a tax savings tool. It helps you get back extra tax money you paid earlier when you exercised your Incentive Stock Options (ISOs).
- Additional Medicare TaxThis is a 0.9% extra tax on high earners. It applies to income from your job and your stock awards once your pay goes over certain yearly limits.
- Alternative Minimum Tax (AMT)The AMT is a secondary tax system that checks if you owe extra money to the IRS. It ensures that people who use many tax breaks still pay a minimum amount of tax.
B
- Basis (Cost Basis)Your cost basis is the price you paid for your stock. You subtract this amount from your sale price to figure out your profit for taxes.
- Blackout PeriodA blackout period is a set time when you are not allowed to buy or sell your company stock. This happens to prevent unfair trading based on private company information.
C
- Capital GainA capital gain is the profit you make when you sell something you own, like company stock, for more than you originally paid for it.
- Cashless exerciseExercising options and immediately selling some or all of the shares to cover the cost, so you pay nothing up front.
- CliffA cliff is a waiting period you must complete before you start earning your company stock. If you leave your job before this date, you lose all the equity you were promised.
D
- Disqualifying DispositionA disqualifying disposition happens if you sell your Incentive Stock Options (ISOs) too soon. This changes how your profit is taxed, making more of it count as regular income.
- Double-Trigger RSUA type of company stock grant that only pays out if you stay with the company for a set time and the company experiences a major event, like going public on a stock exchange.
E
- Early ExerciseBuying your company stock before you have officially earned the right to own it. If you leave your job, the company can buy those shares back from you.
- Effective Tax RateYour total tax divided by your total income. It is almost always lower than your top bracket, and very different from what was withheld.
- Employee Stock Purchase Plan (ESPP)An ESPP lets you buy company stock directly from your paycheck, often at a 15% discount. It is a way for employees to become company owners.
- Estimated Tax PaymentsQuarterly payments sent to the government to cover taxes not taken out of your paycheck. This helps avoid owing a large bill when you file your tax return.
- ExerciseExercising is the act of buying company shares using the stock options you were granted. It turns your right to buy stock into actual ownership of shares.
- Extra withholding (W-4 Step 4(c))A fixed dollar amount you ask your employer to withhold from every paycheck, on top of normal withholding.
F
- FICAFICA is a federal tax for Social Security and Medicare. It is taken out of your paycheck and certain types of stock compensation.
- Failure-to-file penaltyAn IRS penalty of 5% a month on unpaid tax when your return is filed late, up to 25%.
- Failure-to-pay penaltyAn IRS penalty of 0.5% a month on tax still unpaid after the April deadline, up to 25%.
- Fair Market Value (FMV)Fair Market Value is the current price of one share of your company's stock. It is the amount you would pay to buy or sell a share on the open market today.
- Form 3921Form 3921 is a summary your company gives you after you buy company stock using Incentive Stock Options. It lists important dates and prices you need for your taxes.
- Former-state residencyWhen you move, the state you left can still tax the part of your equity income earned while you worked there.
G
H
I
- ISO $100,000 LimitEach year, you can only receive up to $100,000 worth of special tax-favored stock options that become available to use. Any options over this amount are treated as regular options.
- Incentive Stock Option (ISO)An ISO is a special stock option for employees. If you follow specific holding rules, you may pay lower taxes on your profits compared to regular income.
L
- Lockup PeriodA lockup period is a set amount of time after your company goes public when you are not allowed to sell your shares.
- Long-Term Capital GainA long-term capital gain is the profit you make when you sell an asset you have owned for more than one year. These profits are often taxed at lower rates than your regular paycheck.
N
- Net Investment Income Tax (NIIT)This is a 3.8% extra tax on money you make from investments, like selling stock, if your total yearly income is above certain limits.
- Non-Qualified Stock Option (NSO)A common type of stock option where you pay taxes on your profit the moment you buy the shares. You can get these even if you are not a full-time employee.
P
Q
- Qualified Small Business Stock (QSBS)Qualified Small Business Stock (QSBS) is a special type of company stock that lets you pay little or no tax on the profit when you sell it.
- Qualifying DispositionA qualifying disposition happens when you hold your Incentive Stock Options long enough to get lower tax rates when you sell the shares.
R
S
- SALT Deduction CapThis is a limit on how much you can subtract from your income to lower your taxes when you pay state and local taxes like property or income tax.
- Safe HarborA safe harbor is a target amount of tax you pay during the year to avoid a penalty. If you hit this target, the IRS won't fine you for underpaying, even if you owe more in April.
- Secondary Market (Private Shares)Where people buy and sell shares of private companies from existing shareholders, before an IPO. Gains are taxed only when you sell.
- Sell-to-CoverA way to pay taxes on your stock awards by selling just enough of your shares to cover the tax bill automatically.
- Short-Term Capital GainA short-term capital gain is the profit you make from selling an asset, like company stock, that you owned for one year or less. These profits are taxed at your regular income tax rate.
- Spread (Bargain Element)The spread is the profit you make when you buy company stock at a discount using an option. It is the difference between the stock's current price and the price you pay to buy it.
- State AMTA state version of the federal alternative minimum tax. California's is the one most equity holders run into.
- State surtaxAn extra state tax on income above a set amount, added on top of the regular brackets.
- Strike PriceThe strike price is the fixed cost you pay to buy your company stock when you decide to use your stock options. It is set when you are first given the options.
- Supplemental WagesExtra pay beyond your base salary, such as bonuses or stock awards. Your employer usually takes 22% for federal taxes.
T
U
V
W
- Wash SaleA rule that says you cannot claim a tax loss if you buy the same stock within 30 days of selling it for a loss.
- WithholdingWithholding is money your employer takes out of your paycheck or stock award to pay your income taxes to the government for you.
- Workday SourcingWorkday sourcing is how states decide how much tax you owe on stock awards based on how many days you worked in that state while earning them.
#
- 409A ValuationA 409A valuation is an official price tag for a private company's stock. It is used to set the price at which you can buy your company stock options.
- 83(b) ElectionThis is a tax choice you make to pay taxes on your stock now, instead of later when it fully belongs to you. You must file this form within 30 days of getting the stock.
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