The income tax and FICA when you exercise non-qualified stock options.
About the NQSO Tax calculator
When you exercise non-qualified stock options (NQSOs), the bargain element — the spread between the fair market value and your strike price — is taxed immediately as ordinary W-2 wages. That means federal and state income tax plus FICA (Social Security and Medicare), withheld at the flat 22% supplemental rate (37% above $1M). Unlike ISOs, there's no AMT — but unlike ISOs, the tax is due the year you exercise. This calculator estimates that tax, the cash needed to exercise and cover it, and the under-withholding gap.
Frequently asked questions
How are NQSOs taxed when I exercise?
The bargain element (FMV minus strike, times shares) is ordinary income on your W-2 in the year of exercise — subject to federal and state income tax and FICA. Your cost basis for a later sale becomes the FMV at exercise.
What's the difference between NQSO and ISO taxation?
NQSO exercise is taxed as ordinary income (plus FICA) right away, with no AMT. ISO exercise triggers no regular tax but creates an AMT preference. NQSOs are simpler but taxed sooner.
Why does exercising NQSOs leave a tax shortfall?
Employers withhold federal tax on the bargain element at the flat 22% supplemental rate (37% above $1M). If your marginal rate is higher, too little is withheld and you owe the difference at filing.
Do I pay tax again when I sell NQSO shares?
Only on the gain since exercise. Your basis is the FMV at exercise that was already taxed as income; any further appreciation is a capital gain (long-term if held over a year from exercise).