However, the tax law creates a special exception for stock options. As a result, the employee is allowed to chose when he wants to pay the taxes. As long as he has not exercised, he does not pay any taxes. This is an interest free loan from the government of the tax payment. Again, employees should wait as long as possible to pay off an interest free loan.
Most employees understand the value of tax-deferral with their retirement accounts.
They want to contribute as much as possible because they can defer the taxes until retirement. An employee stock option is taxed identically to a qualified plan. Therefore, if your employees understand the value of deferring income and taxes in their retirement accounts, they will also understand the value of deferral in stock options. Finally, employees need to understand that an NSO should be treated like a cash bonus program for tax and investment decisions post exercise. A nonqualified stock option is taxed exactly like a cash bonus upon exercise.