ICYMI: A Guide To Stock Comp Abbreviations

Forbes Money Taxes ICYMI: A Guide To Stock Comp Abbreviations Bruce Brumberg, JD Contributor Opinions expressed by Forbes Contributors are their own. I make the law and the tax code understandable to everyone Following May 23, 2023, 12:36pm EDT | Press play to listen to this article! Got it! Share to Facebook Share to Twitter Share to Linkedin Stock comp abbreviations got you confused? Read on for a guide to the most important ones to know. getty As if texting shorthand wasn’t confusing enough (IKR?), when you have stock options, restricted stock units, or an employee stock purchase plan, you are plunged into an alphabet soup of initialisms, acronyms, and jargon.

Do you know NQSOs from ISOs? AMT from FICA or NIIT? What’s the FMV at option exercise? Can you sell company stock when you know MNPI? What’s the deal with RSUs, PSUs, ESPPs, and SARs? With a little practice, it’s easy to become proficient in these abbreviations—and BTW, given how long and cumbersome some of the underlying terms are, you’ll soon learn to appreciate them. Moreover, learning these abbreviations is a good way to become familiar with some of the key features and details of stock compensation. This article provides a handy guide, organized by topic.

WYSIWYG: Types Of Grants SBC: stock-based compensation , pay that involves company stock rather than cash. ESO: employee stock option , a right that a company awards to purchase a specific number of its shares for a specified price (exercise price) and period (often up to 10 years). Employee stock options are different from listed or exchange-traded options.

NQSO or NSO: nonqualified stock option , the basic and most common type of ESO. NQSOs do not qualify for special tax treatment under the Internal Revenue Code (IRC). MORE FOR YOU ‘XO, Kitty’ Immediately Dethroned In Netflix’s Top 10 List By A New Show New MacBook Leak Reveals Apple s Disappointing Decision Dodgers Reverse Decision Sisters Of Perpetual Indulgence Included In LGBTQ Pride Night Over Objections ISO: incentive stock option , the other major type of stock option.

An incentive stock option is a type of ESO that qualifies for special tax treatment under the IRC if certain requirements and holding periods are met. RSU: restricted stock unit , the most common type of equity award nowadays in public companies. A grant of RSUs is a promise to issue you a set number of shares after you’ve met the related vesting conditions, usually a specified period of continued employment or services for your company.

PSU: performance share unit , a grant of shares that vests or pays out based on performance rather than just continued employment. Performance-based grants can be in the form of performance stock awards (PSAs), which are similar to restricted stock, or performance stock units (PSUs), which are similar to RSUs. The most common performance goal metrics are total shareholder return (TSR) and relative total shareholder return (rTSR).

ESPP: employee stock purchase plan , a type of broad-based stock plan that permits employees to use payroll deductions accumulated over a purchase period (e. g. one, three, six, twelve months) to acquire stock from the company, often at a discount or at least without commission.

SAR: stock appreciation right , a contractual right that lets you receive cash or stock equal in value to the appreciation of a specified number of company shares between the grant date and the exercise date. The taxation of SARs is similar to that of NQSOs. LTI: long-term incentive , a formal name for stock and cash compensation that is earned based on a time horizon, performance goal, or vesting period of more than one year, by contrast with short-term incentives (e.

g. an annual cash bonus). OMG: Taxes OI: ordinary income .

Salary, wages, interest, and types of income taxed at ordinary tax rates. Most forms of stock compensation generate ordinary income, and tax withholding applies. CG: capital gain , income that arises from the sale of a capital asset, such as the sale of shares acquired from your equity comp.

Capital gains and losses may be short-term (held 12 months or less) or long-term (held longer than 12 months). Short-term capital gains (STCG) are taxed at the rates of ordinary income. Long-term capital gains (LTCG) are taxed at 0%, 15%, or 20%, depending on your taxable income during the year.

AMT: alternative minimum tax . The alternative minimum tax system runs parallel to ordinary income tax. Under the AMT system, your alternative minimum taxable income (AMTI) is similar in concept to adjusted gross income (AGI) for ordinary income tax.

When you exercise ISOs and hold the shares beyond the calendar year of exercise, the spread is part of your AMTI and you can trigger the AMT , depending on a number of other factors. FICA: Federal Insurance Contributions Act . Together, Social Security and Medicare taxes are called FICA taxes because they are collected under the authority of the Federal Insurance Contributions Act.

You know them from your paycheck and the Form W-2 you use for your tax returns. FICA taxes, also know as the federal payroll taxes, apply when you exercise NQSOs or SARs and at the vesting of restricted stock and RSUs. FMV: fair market value .

The FMV of a company’s stock is used to determine the amount of taxable income to report for an exercise of NQSOs and SARs and for the vesting of restricted stock/RSUs. The FMV is also used to set the exercise price of stock options on the grant date. IRC: The Internal Revenue Code , possibly the most complex tax system in human history, is the body of legislation that governs all federal taxation in the United States, including the taxes that apply to stock compensation.

For example, IRC Section 422 governs the taxation of ISOs, while Section 423 sets the rules for tax-qualified ESPPs. NIIT: Net Investment Income Tax , a 3. 8% Medicare surtax on investment income, such as capital gains and dividends, when your income is over specified threshold amounts.

This extra 3. 8% tax applies on top of the usual capital gains tax (15% or 20%, depending on income) for taxpayers with yearly modified adjusted gross income (MAGI) of more than $200,000 (more than $250,000 for married joint filers). FITW: federal income-tax withholding , which applies at the exercise of NQSOs and SARs and the vesting of restricted stock and RSUs.

QSBS: Qualified Small Business Stock . Stock in a startup company that allows you, under certain conditions, to sell shares held more than five years at a 0% capital gains rate. There are detailed rules that determine whether the new company’s stock, and your stock, is QSBS.

SRF: substantial risk of forfeiture , a tax term that applies when rights to compensation are conditioned upon future services (e. g. working X years for a company) or certain targets (e.

g. reaching a performance goal or stock price). If the condition is not satisfied, the stock is forfeited.

In the context of restricted stock and RSUs, income is not recognized while the stock is still subject to risk of forfeiture (i. e. must vest).

BTW: Other Abbreviations PTEP: post-termination exercise period , the length of time you have to exercise stock options after your employment at the company ends. This period is almost always shorter than the term that would remain if your employment had continued. It usually lasts 90 days from the termination date, but it can be much less, and if you miss the exercise window you cannot get the options back.

See your stock plan and grant agreement for details, including what happens with a leave of absence (LOA). BSM: Black-Scholes model , a complex mathematical formula used to calculate the theoretical present value of a stock option using variables such as stock price, exercise price, volatility, and expected option term (i. e.

the time until exercise). Black-Scholes is the option-valuation model most commonly used in accounting for stock options and in certain financial-planning tools. CIC: change in control .

This denotes a merger or acquisition or other substantial change in shareholder ownership of a company. A change in control can trigger the acceleration of vesting in stock options, restricted stock, and RSUs. The specifics of what constitutes a change in control and its impact are defined in your company’s stock plan documents.

SDS: same-day sale . In this type of option exercise, the immediate sale of the underlying shares from the exercise generates the proceeds to pay the exercise price and any tax withholding. This is also called a cashless exercise .

STC: sell-to-cover . In this type of option exercise you sell just enough of the stock to “cover” the total exercise costs (exercise price + taxes), with the remaining stock held. With restricted stock/RSUs, this applies to selling shares at vesting to cover the tax withholding.

GTC: good-till-canceled order . This is an order to sell stock associated with an exercise when the stock reaches a specific price while the order remains open. To prevent sales of its stock from occurring outside authorized trading windows, some companies do not allow this.

IPO: initial public offering , the process in which a privately held company first offers its shares to the investing public, usually through a registration statement under the securities laws. An IPO is what brings a private company into the stock market as a public company. SEC: Securities and Exchange Commission , the US federal government agency responsible for the supervision and regulation of the securities industry, the stock markets, securities offerings, and the ongoing disclosure obligations of public companies in the United States.

SEC rules and regulations affect many aspects of equity compensation and stock ownership. MNPI: material nonpublic information , confidential information that will move the company’s stock price (whether up or down) when it is made public. Buying or selling stock when you know material nonpublic information is insider trading , which is illegal, along with insider tipping .

To avoid getting into trouble for insider trading, refrain from trading company stock when you know MNPI. GTK: Further Resources Hopefully the wealth your equity comp or ESPP creates will give you lots of WAFF. A full glossary of stock compensation terms, featuring detailed definitions, is available at myStockOptions.

com , a resource on all aspects of stock comp and the related financial and tax planning. The glossary is also available as a smartphone app: Stock Compensation Glossary , available free from the App Store (Apple devices) and from Google Play . It includes a “term of the day” and a handy quiz.

The myStockOptions website also has an interactive quiz on stock comp abbreviations where you can test your knowledge. Follow me on Twitter . Check out my website .

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