Contributed by KeriC, FreeTaxUSA Agent, Tax Pro
An Employee Stock Ownership Plan, or ESOP, allows employees to own stock in the company without having to purchase shares.
The company contributes its stock (or money to buy stock) into an ESOP trust, which holds the shares for employees. This is done over time, allowing employees to accumulate more ownership as they continue to work for the company.
An ESOP is more common among closely held companies and is usually created when retiring owners want to transfer ownership of the company to one or more employees.
Income from an ESOP is reported on Form 1099-R – like other retirement plans such as a 401(k). There are a couple of scenarios where ESOP income is recognized and reportable on a tax return
- When employees leave or retire, they can sell their shares back to the company or on the open market, depending on the plan's specifics. This is treated like regular retirement income. If these distributions are taken before the employee reaches the age of 59.5, the distribution would be subject to the 10% penalty.
- Dividend income from company stock in the ESOP can be withdrawn by employees before they turn 59.5 years old without paying the 10% early withdrawal penalty. The income is still reported on Form 1099-R, but this is income before the employee has reached retirement age.
When the 1099-R is received, follow this menu path: Income > Retirement Income (1099-R).
