ESPP accounting revolves around employee stock purchase plans (ESPP). An employee stock purchase plan allows employees to buy shares of their employer’s stock, usually at a discounted rate compared to what the market rate is currently. The employees get to choose how much they want to withhold from each paycheck to purchase the discounted stocks. Here are the four phases ESPPs have to go through.
In this phase of an employee stock purchase plan, the employer grants the employees the option to purchase stock. The stock is in the employer’s company or the parent company. The price is predetermined based on the stock’s fair market value. The employer can then offer discounts up to 15% on the purchase price of its stock.
Tax accountants will tell you the offering period phase is the time where the employees can accumulate savings for the future purchase of their company’s stock. The employees get to choose to have a percentage or a fixed dollar amount deducted from each of their paychecks, as stated previously. The deductions from the paycheck come out on an after-tax basis. This means that the income tax, which in New York ranges from 4% to 8.82% as of 2017, and FICA taxes have already been taken out of the paycheck before the money comes out for the ESPP purchases.
At the end of the offering period, the employer will take all the money that the employee saved up, and they will use that money to buy shares of the company’s stock. The securities brokerage administering the ESPP plan will buy the shares of the company’s stock and transfer ownership of the stock from the company to the participating employees. Any cash not used to buy the stock is refunded back to the employee.
Finally, the disposition phase completes the process. After the shares are transferred, the employee can do whatever they want with them. They can trade them, exchange them, transfer them, or give them away.
The reasons ESPP accounting is helpful and necessary is because businesses have to record their ESPPs in their financials. Without the help of accounting professionals, this process would be much more difficult.