A major disadvantage of an NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

Question

Quizplus · Accepted Answer

This is a true statement. When an employee exercises a non-qualified stock option (NQSO), they must recognize ordinary income equal to the difference between the exercise price and the fair market value of the stock on the exercise date. This income is subject to income tax, Social Security tax, and Medicare tax. However, the employee does not receive any cash from the company to pay these taxes, which can be a major disadvantage of NQSOs.

A Major Disadvantage of an NQSO Is That an Employee