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I have been granted some non-qualified stock options by my employer. The strike price is the closing price of the company's stock on the grant date. I have read the material that came with the grants, and I've looked at several IRS publications. Here's what I understand about the tax treatment of NQSOs:

The granting of the options is not an event for tax purposes. When the options are exercised, any gain is treated as ordinary income at the time of exercise. If the stock is not liquidated immediately upon exercise, its cost basis is equal to its fair market value on the exercise date. Example: I exercise 100 options with a strike price of $20. The stock is currently trading at $30. This generates 100 * ($30 - $20) = $1000 of ordinary income for me. I pay $2000 plus taxes on $1000 for the 100 shares of stock, which then have a cost basis of $3000.

It is clear that Federal and State income taxes apply to the $1000 gain on the exercise date. Question: Do Social Security and Medicare taxes also apply? The stuff I've been reading seems to imply that this is the case, but hasn't directly said so.

Patzer
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