Stock option plans and other stock plans let you compensate your employees or independent contractors for improving the value of the company without making them immediately liable for taxes on the value of their stock or options. There are several variations. These include:
Classic stock options: Employee or Contractor purchase rights, exercisable immediately or after a vesting period. Company gets deduction and employee gets taxable income as capital gain when vests. If related persons (10% or more of company owned), then “Incentive Stock Options”, exercise price must be 110% or more of stock fair market value at time of grant.
Stock appreciation rights: Employee or Contractor gives up option for stock value at time of exercise, may have a vesting period. E or IC gets ordinary income at time of exercise, not of grant, less price paid on vesting (usually price when option granted). Company deduction on exercise.
Phantom Stock: Defined bonus rights, usually based on value of company on sale or distributions to stockholders, but no management or transfer rights to holder. Ordinary income to employee or contractor when rights trigger event occurs, company gets deduction.
Employee Stock Purchase Plan: No employee tax when exercised, employees pay capital gains tax when sell shares, no FUTA.FICA tax when sell, no company deduction. Minimum holding periods apply. Maximum annual accrual limit $25k/employee FMV company stock.
For more detail, see https://www.slideshare.net/wpriceiit/stock-and-similar-plans-may-2019
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