Employee Stock Purchase Plan – Everything You Need To Know

An Employee Stock Purchase Plan (ESPP) might be available at work. “Is it an excellent way to spend money?” “How do you tax it?” “Should you sign up for it?” 

These are probably the questions you have.

Keep reading, as this article will tell you what Employee Stock Purchase Plans are and how they work.

There will also be some tips on how to use them.

Full disclosure – we are not CPAs, attorneys, or licensed experts on the subject. The information provided here are opinions based on our research. 

Talk to people you know who work in those fields to get their professional advice.

Now that that’s out of the way, we can begin.

Man using laptop - Employee Stock Purchase Plan

Employee Stock Purchase Plan or ESPP

An ESPP is a benefit that some publicly traded companies give to their employees.

It lets employees buy shares of the company at a discount so that they can invest in the company.

Most programs have a time frame of 12 months during which you can invest.

If an employee chooses to join, the company can set aside a portion of their pay, up to $25,000 per year, to invest.

The company uses this money to buy shares of company stock for less than the market price, usually about 15% less than the market price. 

Employers sometimes offer a benefit called “looking back,” which lets workers buy something later even if they missed the window.

Talk to your boss about this.

ESPP Taxation

When was the investment made?

Before or after taxes? 

Before making any financial commitments, understanding the tax implications of participating in your company’s Employee Stock Purchase Plan is essential.

This investment is made with cash that has already been taxed.

So, you already paid taxes on the money you used to buy shares. 

You’ll only owe taxes on your profits while holding the stock, not the total sale price.

The type of tax you pay when selling shares is also influenced by how long you’ve owned them.

If you sell immediately after purchase, you must pay the income tax on the gain you just made. 

There are benefits and drawbacks to holding stock for a long period because you can’t predict how much it will increase in value.

Wise Investments With ESPPs

ESPPs can be a great way to invest.

If you buy a stock that goes up in value, it’s great to get it at a discount of about 15%.

A 15% discount on an ESPP plan gives investors a 17.6% return on their money.

Here’s an example.

Say that each share of a stock costs $100.

Employees use their ESPP program to buy shares for $85 each at a 15% discount.

They can sell shares right away for $100 each.

This sale gives an instant return of $15 per share on an $85 per share investment.

$15 / $85 = 17.6%

If you put in a maximum of $25,000 per year to your ESPP plan, your employer gives you thousands of dollars in “free money” each year.

It’s more than $130,000 over 30 years.

But there is a risk, of course.

There is always some danger.

Money Loss on an ESPP

Money Loss on an ESPP

You probably already know that the stock market can go up and down, and an employee stock purchase plan is no different.

In general, the more you stand to gain from an investment, the more you stand to lose. 

Does this mean that you shouldn’t invest in it?

Of course not. In life, everything is a risk—literally everything.

You are better off than most people who invest on their own.

This is because you know everything about the company you work for.

You can tell what kind of company it is.

Like “how people are treated by management” and “how teams are built.”

Are there new products being made?

Maybe you see growth or expansion opportunities.

You can use this information to predict the stock price with some degree of accuracy.

Investment Amount

Putting money into your ESPP should be a part of your overall plan for your personal finances.

This depends on your own goals and how varied you want your money to be. 

If you’re good at making plans for your money, stick with what works.

If money worries stress you out, you should talk to a professional who can help you choose the right mix of investments.

How much money you invest and the risk you’re willing to take are both up to you.

If your company matches your 401(k) contributions, we will put as much as possible into that first. 

A 401k match is a free money from your company that doesn’t depend on how well the company’s stock does.

Stock Options

Stock options are often part of the pay for the top employees at a company.

They have already been allowed to buy in at a certain strike price. 

They may not want to participate in the ESPP because it could be risky, and they want to avoid taking risks.

There is a strategy that employees with stock options can use with their employee stock purchase program. 

They can buy company stock at a 15% discount and sell the same amount simultaneously to reduce risk.

In this case, the money is made right away.

Then, you can put the profits into tax-advantaged accounts to save for the long term. 

This way, the company plan helps you save for the long term instead of giving you money immediately.

Conclusion

Let’s sum everything up.

The point of this article was to give you an overview of employee stock purchase plans and some ideas about them. 

Take some time and build your personal financial plan around the one your company has.

Personal finance is a matter of great importance and your responsibility. 

Nobody else can do this for you.

You have the knowledge and the resources; go for it!

Good luck, and always remember to stay safe!

Disclosure:  this article might contain links to the resources discussed.
Some of the links are affiliate links, meaning that I will make a small commission if you purchase a product or service by using the link. You get the same price whether you use our special link or not, and sometimes I’m able to get you an even better deal through my relationships!  More info in my privacy policy.

Brooks Conkle Banner Image
Brooks Conkle

Brooks is an Entrepreneur, Sponge, Father, Husband, & Follower of the Golden Rule. He has over 15 years of experience as an entrepreneur after graduating with a BSBA in Finance from Auburn University. He’s addicted to growing new business ideas and any food that includes chocolate and peanut butter. Brooks is a firm believer in creating multiple streams of income and creates content here on BrooksConkle.com to help other hustlers in the areas of marketing, online business, personal finance, and real estate.