What Is the Stock Offset on Your Paystub?

A paystub serves as a detailed record of an employee’s earnings and deductions for a specific pay period. It typically outlines gross wages, various taxes withheld, and other deductions, ultimately arriving at the net pay. While many people are familiar with traditional cash wages, compensation structures increasingly include non-cash elements, such as company stock. These non-cash components introduce new line items on a paystub that might seem unfamiliar. The “stock offset” is one such entry, reflecting the accounting for stock-based income.

The Nature of Stock Compensation Income

Companies frequently use stock-based compensation to attract, retain, and incentivize employees, aligning their interests with the company’s performance. Two common types that lead to income recognition on a paystub are Restricted Stock Units (RSUs) and Non-Qualified Stock Options (NSOs). These forms of compensation are treated as taxable income when certain conditions are met.

Restricted Stock Units (RSUs) represent a promise to deliver company shares to an employee once specific vesting conditions are met, often based on time or performance milestones. When RSUs vest, their fair market value at that time is considered ordinary income, similar to regular wages. This income is subject to federal income tax, state income tax (where applicable), and employment taxes, specifically Social Security and Medicare taxes (FICA).

Non-Qualified Stock Options (NSOs) grant an employee the right to purchase company stock at a predetermined price, known as the exercise or strike price. Unlike RSUs, NSOs are not taxed when granted or when they vest. The taxable event occurs when the employee exercises the options, meaning they choose to buy the shares. At exercise, the “bargain element,” which is the difference between the fair market value of the stock and the exercise price, is recognized as ordinary income. This income is also subject to federal, state, local, and FICA taxes.

Decoding the “Stock Offset” Entry

The “stock offset” entry on a paystub is an accounting mechanism designed to properly account for the non-cash income derived from stock compensation. When stock compensation, such as vested RSUs or exercised NSOs, becomes taxable, its value is added to the employee’s gross taxable wages for that pay period. This inclusion ensures that the non-cash income is accurately reported for tax calculation purposes.

The “stock offset” reflects the gross value of vested or exercised stock included in the employee’s taxable wages. This entry is not a cash deduction from regular salary; instead, it adjusts the paystub to show comprehensive taxable income, encompassing both cash and non-cash elements.

While the “stock offset” increases the gross taxable income amount displayed on the paystub, the employee’s actual cash paycheck does not increase by the full value of the stock. This is because taxes are immediately withheld from this recognized income. The offset ensures that the employer properly reports the compensation and withholds the necessary taxes, even though the employee receives shares rather than cash for that portion of their earnings.

Tax Withholding and Share Netting

Employers are responsible for calculating and withholding taxes on all forms of compensation, including stock-based income. When stock compensation vests or is exercised, the employer determines the total tax liability, which includes federal, state, and local income taxes, as well as Social Security and Medicare taxes (FICA). These calculations are based on the combined value of the employee’s cash wages and the gross value of the stock compensation.

To cover these tax obligations, employers commonly utilize a method known as “netting shares” or “sell-to-cover.” Instead of requiring the employee to pay the taxes out of their cash earnings, a portion of the newly vested or exercised shares is automatically sold. The proceeds from this immediate sale are then used to remit the required tax withholdings to the appropriate tax authorities.

This process ensures tax compliance without necessitating an upfront cash payment from the employee for the tax liability at the time of the vesting or exercise event. After shares are sold to cover taxes, the employee receives the remaining net shares, which are then deposited into their brokerage account.

What to Look for on Your Paystub and W-2

To understand how stock compensation impacts your earnings, locate the “stock offset” or a similar label on your paystub. This entry might be identified as “RSU income,” “stock comp,” “non-cash income,” or specific offsets like “NQ Offset” or “RSU Offset,” typically found within the earnings or “other pay” sections. Verify that this amount contributes to your overall “gross wages” or “taxable wages” total for that pay period.

The gross value of your stock compensation, as indicated by the “stock offset” amount, will be included on your annual Form W-2. Specifically, this income is reported in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). For Non-Qualified Stock Options, the income from exercise may also be separately identified in Box 12 with Code V. If any shares were sold to cover taxes or for other reasons, your brokerage firm will typically issue a Form 1099-B, which reports the proceeds from the sale of securities to both you and the IRS.