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A company that was a customer of my former employer granted me some stock options. Because I was not an employee of this company, they were non-qualified options rather than ISOs. The company was bought by a public company, the options were converted to options in a stock that was actually publically traded and thus worth something, and I exercised the options. Because I was not an employee of the granting company, no withholding was done. I'll owe taxes on the spread next April, and I have the money set aside to pay them. (My wife and I tweaked our W4s to be absolutely certain to meet the 100% safe harbor rule, so we don't need to make quarterly estimated tax payments.)

Even though I wasn't really self-employed, my understanding from Fairmark is that the bargain element is taxable as SE income rather than regular W2 compensation income, since the options were from a company other than my employer.


First question:

I'll earn enough from my regular job to hit the Social Security tax cap. That means no Social Security SE tax liability on this extra income, right? I understand that I'll owe income tax and 2.9% SE Medicare tax, and that half of the Medicare tax (the part that would be paid by the employer if this were employee income) will generate a tax deduction.


Second question:

Does income from non-employee NQ options count as SE income for purposes of SEP eligibility? My thinking is that if I get a 1099 for it, and I have to pay SE tax on it, it should, and I should be able to put 13.0435% of the spread in a SEP and reduce our tax burden a bit. On the other hand, this doesn't really feel like SE income to me, since I earned it for my role as an employee, just in a different company from the one granting the options. Are there situations where one has to pay SE tax on income, receives a 1099 rather than a W2 for the income, but is not allowed to contribute it to a SEP?

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