NSO tax calculator

How NSO taxes work

Non-qualified stock options (NSOs) are the most common form of employee stock option. When you exercise, the difference between the fair market value and your strike price - the spread - is treated as ordinary compensation income that year. Your employer withholds federal tax (usually the 22% supplemental rate), state tax, and FICA, exactly like a bonus. This NSO tax calculator breaks out each piece so you can see your net benefit.

Worked example

Say you exercise 5,000 NSOs with a $2 strike at a $12 fair market value, you already earned $200,000 this year, and you live in California:

• Spread (ordinary income): ($12 − $2) × 5,000 = $50,000
• Federal (22% supplemental): $11,000
• California (10.23%): $5,115
• Social Security: $0 - already over the $184,500 wage base
• Medicare (1.45% + 0.9% surtax): $1,175
• Total tax: about $17,290
• Net benefit: roughly $32,710

That tax is due in the year you exercise, even if you keep the shares - so make sure you have the cash or sell enough shares to cover it.

NSOs versus ISOs

The key difference is which tax system applies:

• NSOs are taxed under the regular system as ordinary income at exercise, plus FICA. Simple and predictable, but no preferential treatment.
• ISOs are not taxed under the regular system at exercise; instead the spread becomes an alternative minimum tax preference if you hold past year-end. They can qualify for all-capital-gains treatment, which is more favorable - at the cost of AMT complexity.

If you hold ISOs too, model them separately with the AMT / ISO calculator, because in a year you exercise ISOs the AMT often dominates your planning.

What happens when you sell

After exercising NSOs, your cost basis is the fair market value at exercise - the amount already taxed as ordinary income. When you sell:

• Sell immediately and there is essentially no further gain, so no second tax.
• Hold and any appreciation above that basis is a capital gain (long-term if held over a year), taxed at the lower rates. Any decline is a capital loss.

The 22% under-withholding gap

As with RSUs and bonuses, the flat 22% federal rate is often too low for high earners. If your marginal bracket is 32-37%, the spread can leave you owing more at filing - plan a quarterly estimated payment or extra withholding for the difference.

Common mistakes

• Exercising without the cash to cover the tax that lands the same year.
• Forgetting the extra 0.9% Medicare surtax above $200,000.
• Double-counting the spread by reporting a $0 basis when you later sell.

To compare option types side by side, use the stock option tax calculator; for the all-in cash to exercise ISOs, see the ISO exercise tax calculator.