Tax Law related to Stock Options

In payroll tax law, stock options are considered a form of employee compensation. When an employee exercises their stock options (buys the stock at a set price), the difference between the exercise price and the fair market value of the stock is taxed as income. This income is subject to payroll taxes, which include Social Security and Medicare taxes. Employers must report this income and withhold the appropriate taxes when the options are exercised. It's essential for employees to understand that exercising stock options can lead to tax implications, impacting their overall income tax situation.