Employee Share Plans in Europe and the USA - Sorainen

Employee Share Plans in Europe and the USAUnited States of America5.2 Employer tax and social security contributions5.2.1 Corporation tax deduction:• Non-qualified stock options: An employer is entitled to acorporation tax deduction upon the exercise by an employee of anonqualified stock option. The amount of the deduction is equal tothe ordinary income recognised by the employee.• Incentive stock options: The exercise and qualifying disposition ofstock acquired under an ISO will not provide any corporation taxdeduction for the employer. However, the employer is entitled to adeduction for the amount the employee recognises ascompensation on a disqualifying disposition e.g. where the ISOHolding Period, as described under paragraph 6.2 below, is notsatisfied.5.2.2 Social security contributions: At the time the employee recognisescompensation income (i.e. when the employee exercises the stockoptions) the compensation income will be subject to Medicare and socialsecurity taxes. Currently the employer's share of (i) Medicare tax is at arate of 1.45% and (ii) social security tax is at a rate of 6.2%. Socialsecurity taxes are not due on compensation income that exceeds thetaxable wage base (currently $106,800 for 2010). (The actual full rates(including both employee and employer portions) for Medicare andsocial security taxes are 2.9% and 12.4% respectively. However, theserates are divided equally between the employer and the employee.)5.3 Tax withholding• Non-qualified stock options: At the time of exercise of a non-qualifiedstock option by an employee, an employer is required to withhold federalincome and employment (e.g. social security, Medicare and unemploymentinsurance) taxes on the difference between the fair market value of the stockat the time of exercise and the exercise price. 15• Incentive stock options: An employer is not required to withhold federalincome and employment taxes in connection with the exercise of an ISO or adisqualifying disposition of the stock acquired by an employee pursuant tothe exercise of an ISO.15The income recognised on exercise of a stock option is treated as supplemental wages subject towithholding at the applicable supplemental wages withholding rate.UK/1729295/03 208 September 2010