What tax do I have to pay on employer stock options?

The company I have worked with for 10 years is in the process of being sold to a foreign owner. The company will be registered abroad and continue to operate in Ireland.

Under the terms of the sale, any eligible staff member must exercise their unused stock options prior to the sale. I have accumulated options and have never exercised options to date.

What are my tax implications?

Mr SD, e-mail

Stock options are increasingly part of compensation packages for companies looking to attract talent in an increasingly tight recruitment market, especially post-Covid.

However, as your example shows, this is not just a recent phenomenon. They have been common, especially among multinational employers, for many years now.

There are different types of diets which can be broadly divided into revenue approved diets and unapproved diets. Being unlicensed is not a problem but each has special tax provisions.

Approved income programs can be one of three types: save as you earn arrangements; approved profit sharing plans; and employee ownership trusts.

Grant of options

We could look at them another day but, despite the rather vague reference in your letter, I believe you are referring to an unapproved stock option plan.

This is where an employer grants you the right to buy stock in the company. You might not pay for them at all, in which case they are called a “null option”, or you might be entitled to buy them at a pre-determined option price.

The documentation will have told you how many shares you are entitled to acquire, what price, if any, you will have to pay and when you can exercise your option.

There are two other factors at play that affect the tax situation: is it a short option or a long option?

A short option is an option that must be exercised within seven years of being granted; a long option is an option that cannot be exercised until more than seven years after being granted.

Given that you’ve been there for 10 years, I’m guessing the options in your case are the last, but we’ll look at both.

It should be mentioned that there is never any obligation to buy the shares; you just have the ability to do it. You are always free to simply let the stock option expire.

If you take a situation like today, where some stocks have fallen sharply because of the war in Ukraine, the rising cost of living, rapidly rising energy prices, or simply of company performance that overwhelms the market like Netflix’s recent quarterly results, the stocks you have options on could be trading below their option price.

Tax situation

Assuming you exercise your options, there will be tax issues. Since your employer is required to notify the tax office when the option has been granted, ignoring the tax issue is definitely not an option.

When you exercise an option, you will be liable for an income tax bill, Universal Social Security (USC), and PRSI. The first two – income tax and USC – are known as the relevant stock option tax (RTSO). It’s a cumbersome acronym but my usage will become clear in a minute.

Tax is due on the difference between the market value of the shares on the date you exercise the option and any amount you paid for the shares. If you also paid something for the original grant of the option, that is also deductible.

By default, the income tax rate due is 40%. If you pay tax at the standard rate of 20%, you must proactively request Revenue through myAccount or in writing to your local tax office for approval to pay only that rate (and any lower USC charges ).

More importantly, you must notify Revenue of your decision to exercise the stock option. And yes, your employer will anyway, so there’s no point in putting it off.

You have only 30 days from the time you exercise the option to file what is called the RTSO1 form, outlining the data for which you exercised your option, your gain and the tax payable. You must also pay any taxes due within that 30-day window, or face the prospect of interest charges. Although the employer has notified Revenue of the action, these taxes will not be deducted at source, like your normal PAYE earnings, so you must do this yourself.

You are also required to file an annual income tax return on Form 11 for any year in which you exercise stock options.

Occasionally, employees ask their employer to sell the shares for them so they can access the funds needed to pay the tax bill. If you do, you will also need to enter this detail on Form 11.

Long options

The above process is the same whether you are dealing with short options or long options. The additional potential problem with long options is that you may also have to repay income tax at the time the stock option was granted – if the option price was below the market price of the stock to this date.

In this case, the tax due at this stage would be calculated on the difference between the option price and the market price of the day.

In this case, the tax (including USC and PRSI) may be deducted by your employer through the PAYE system and remitted by them to the tax authorities. Any tax you owe at this point will be deducted from your tax payable on the subsequent exercise of the stock option.

Based on the limited details of your letter, this was not a problem for you.

Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dominic.coyle@irishtimes.com. This column is a reading service and is not intended to replace professional advice