What You Should Know About Employee Stock Purchase Plans (ESPPs)
Key Points
Enrollment is simple, but details matter. Your plan document spells out eligibility, enrollment windows, contribution limits, discounts, and any “look-back” features.
After-tax payroll deductions buy the shares. Deductions accumulate in escrow until the scheduled purchase date, when your company acquires stock on your behalf.
Once deposited, the shares are yours. They land in a brokerage account and can be held or sold like any other investment—subject to plan restrictions.
Discounts and look-backs create instant value. Many plans let you buy at up to 15 % below market and/or at the lower of the price on the offer date or purchase date.
Taxes are postponed until you sell. The rate you pay—ordinary income vs. capital gains—depends on how long you hold the stock and whether the sale is “qualifying” or “disqualifying.”
ESPPs in Plain English
An Employee Stock Purchase Plan allows you to funnel after-tax dollars from every paycheck into company shares—often at a bargain price. For growing firms, it’s a win-win: employees share in the upside, and the company fosters loyalty without a direct cash outlay.
Participation is voluntary. Once enrolled, your chosen contribution (up to $25,000 per year in IRS-defined value) is withheld, parked in escrow, and used to buy shares on set “purchase dates” (commonly every six months).
Decoding Your Purchase Price
Two levers can tilt the math in your favor:
Purchase-price discount – as high as 15 % off fair-market value (FMV).
Look-back provision – the plan bases the discount on the lower of the FMV at the beginning of the offering period or on the purchase date.
| Offer-Date FMV | Purchase-Date FMV | Plan Formula | You Pay (15% off) |
|---|---|---|---|
| $120 | $100 | lower price = $100 | $85 |
| $80 | $100 | lower price = $80 | $68 |
In the second row, you buy a $100 stock for $68—an immediate 47 % paper gain before the market even opens tomorrow.
When Taxes Enter the Picture
You owe no tax on the purchase itself; the questions start only when you sell.
Qualifying Disposition
Meet both holding rules—
held at least two years from the offer date and
held at least one year from the purchase date—
and only the discount portion is ordinary income; the rest is long-term capital gain.
Example (shares from table above sold later at $150):
Ordinary income: 15 % discount on $80 basis = $12
Long-term gain: $150 − $80 = $70
Disqualifying Disposition
Sell sooner than the rules above and more of the gain is ordinary income:
Ordinary income: sale price − purchase price ($150 − $68) = $82
Any remaining gain (if applicable) is capital gain—short-term if held ≤12 months
Should You Enroll? Six Questions to Ask
Can your cash flow handle the payroll deduction?
Are you already maxing tax-advantaged accounts (401(k), HSA, IRA)?
How much company stock do you own via RSUs, options, or outright shares?
Is your risk tolerance high enough for concentrated single-stock exposure?
Do you have a clear strategy to sell and diversify?
Will the potential tax bill fit within your broader plan?
Because ESPPs use after-tax dollars, you’re free to sell immediately. Many clients at Falcon Wealth Planning choose that route: capture the built-in discount, pay the modest ordinary-income tax, and redeploy the proceeds into a diversified portfolio aligned with long-term goals.
Turning Opportunity into Outcome
Handled thoughtfully, an ESPP can boost total compensation and accelerate wealth creation. Handled haphazardly, it can lead to over-exposure and surprise tax bites. If you’d like to thread that needle with confidence, our fiduciary planners can help you weigh participation, model tax outcomes, and map a disciplined sell-versus-hold strategy.
Ready to see how an ESPP fits your bigger picture? Schedule a complimentary call with Falcon Wealth Planning today.
This material is for informational purposes only and does not constitute individualized investment, tax, or legal advice, nor an offer to buy or sell any security. Information is believed accurate but is not guaranteed. All investments carry risk, including possible loss of principal. Past performance is not indicative of future results. Consult your professional advisers regarding your specific circumstances. Falcon Wealth Planning, Inc. is an independent, fee-only Registered Investment Adviser.
