Nonqualifying or incentive

• Identify the type of employee stock option available to you. Stock options are typically either nonqualifying or incentive. In the case of incentive options, the difference between the purchase price and the market price is not considered income, provided you hold the stock at least two years after the option was granted and a year after the purchase. In that case, there is no Social Security withholding; however, if you fail to meet those requirements, you may find yourself paying taxes upon the sale.
  
  The difference between the purchase price and the market price is subject to Social Security withholding on a nonqualifying plan.
  
  

Payment

• Since you are making a purchase from the employer and not being paid, the employer will typically either require payment of all related taxes at the time of sale or withhold it from a paycheck. If the employer wants cash for the taxes and you are short on money, consider purchasing the stock, then selling all or some of the stock in order to pay the taxes. A stockbroker may also be willing to front you the money, provided you put the stock options up as collateral.
  
  Since this tax payment is a cost related to the option, make sure the difference between the option and the stock market price is great enough to cover the payment, in the event you plan to cash in your option immediately. You may find that you are paying more for this employee benefit than you earn.
  
  

Social Security tax rate

• The 2010 Social Security tax rate, according to the Social Security Administration, is 6.2 percent. Keep in mind that this is only one of the tax withholdings against your stock options profits. You may also be looking at raising the cash to pay federal income taxes, Medicare and state income taxes.
  
  

Estimate

• Remember that the tax withholding during the year is only an estimate. At year end, you may owe the government more. You may want to consult with your accountant to ensure your overall tax picture is an attractive one.