The Microsoft Employee Stock Purchase Plan (ESPP) allows Employees to purchase Microsoft Stock at a Discounted Price
ESPP is a popular benefit that many employees want to participate in.
However, with so many benefits available, how does the Microsoft ESPP compare to other benefits? How should you prioritize your participation in ESPP over your other tax-advantaged benefits?
Below, we ‘ll discuss key features of the ESPP, including how it works, potential tax implications, and considerations for deciding whether or not to participate.
What is the Microsoft Employee Stock Purchase Plan (ESPP)?
You can use Microsoft ESPP to purchase Microsoft stock at a 10% discount. You can defer up to 15% of your salary into the plan.
There’s an annual contribution cap of $25,000. Each quarter, your contributions are used to purchase Microsoft stock. The stock you purchase is held in your brokerage account.
Taxes and Your Microsoft ESPP
The tax implications depend on how long you hold the stock after purchase.
If you sell the stock immediately or within a year of purchase, any gains will be reported as income. This means you’ll pay ordinary income tax.
Even though holding the stock for longer may offer a more favorable tax treatment, we encourage employees to sell their Microsoft stock as soon as it’s purchased each quarter. As mentioned above, you will pay ordinary income tax on this gain, but we think this is a better option for most people.
You likely receive quarterly RSU vests as part of your compensation plan. Between ESPP and these quarterly vests, it’s easy to build up a concentration of Microsoft stock. When you sell your RSUs as they vest, you can use the proceeds to diversify your portfolio.
Making the ESPP Decision
It comes down to cashflow and how you are utilizing your tax-advantaged Microsoft benefits.
Make sure you are taking full advantage of your Microsoft 401(k), HSA, and Mega Backdoor Roth. For employees Level 67 or above make sure you’re fully leveraging the Deferred Compensation Plan.
For most employees, maxing out ESPP at $25,000 yields a net annual gain of around $1,500 to $2,000 depending on their tax bracket. If you’re maximizing your other benefits and have the excess cash flow, then participating in ESPP may make sense for you.
If you are taking advantage of your Microsoft benefits and cash flow is tight, you may want to delay your ESPP participation. The long-term tax benefit you may receive from your other Microsoft benefits will likely outweigh the potential short-term annual gain of ~$1,500.
Prioritizing Your Microsoft Benefits
Microsoft offers a variety of benefits designed to help you invest in your future. When used wisely, these benefits can help reduce your tax bill and provide long-term financial security.
There are several benefits to consider, and you may wonder which ones you should prioritize. We recommend checking out our previous blog for a detailed breakdown and prioritization of your Microsoft benefits.
If you have questions about your Microsoft benefits, please reach out to our team.