Employee Stock Purchase Plan
The company I work for offers an Employee Stock Purchase Plan, or ESPP. If your employer offers this plan, I highly encourage you to join in. Basically here is how it works:
Each pay period, you automatically have money taken out of your paycheck. This money is deposited into a fund which will buy your company's stock on a semi-annual basis, called the offering period. The amount that you pay for the stock is typically at a 15% discount. My company bases the price I pay on the stock’s price at the beginning of the offering period or at the end, whichever is lower. So you are automatically earning money on your money.
Many people who participate in the ESPP sell their stock as soon as it is purchased semi-annually and use that money as income. That is a smart thing to do, but you do receive short-term capital tax. Better tax benefits are given for holding ESPP shares for at least one year from the purchase date and two years from the start of the offering period.
Mrs. Money Matters has participated in the ESPP for three purchase periods and has not sold any stock yet. The price of our stock has not fluctuated too much. Unless I see that the stock is starting to dive (or I need the cash for something), I will hold onto it for at least two years.
ESPP is an awesome tool, because the money is taken out of your paycheck, so you do not see it until the offering period, and suddenly you have more money in your life. If the company you are working for has an ESPP, get involved!
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How to calculate the taxes for ESPP?
1. Case 1: when they are sold after one year of purchase date but less than 2 years after offer date.
2. Case 2: When they are sold after one year of purchase date and more than 2 years after offer date. (If ESPP is offered quarterly then essentially you have to hold stocks for 2 years in this case)
