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Since you'll have to exercise your option through your employer, your employer will usually report the amount of your income on line 1 of your Form W-2 as ordinary wages or salary and the income will be included when you file your tax return.
Each company needs to determine how to allocate ESOP shares to each employee. Some employers look at years of service, while others look at annual compensation. These factors and others can be combined into an allocation formula to divide up the stock into each employee's account.
Stock options are a popular way to reward senior managers and other key employees and align their interests with those of the company and other shareholders. Stock options give employees the right to buy a certain number of shares in the company at a fixed price, known as the grant price.
When the stock options are granted, the total stock option compensation expense is calculated as the fair market value of the stock options x the number of options granted. The company would debit stock option compensation expense and credit ?equity APIC ? stock option?.
There are two main ways to allocate options to your team: As a percentage of the salary - companies offer options to their team based on their salary, seniority, and type of role. As a percentage of the company - in this case, key people might get allocated a fixed % of the company's total equity.