Payroll Taxes on Incentive Stock Options

Allowing the exercise of ISOs to be subject to payroll taxes would be costly to employees, discouraging many of them from participating in stock option plans; this would be a disincentive for companies to offer these incentives to their employees, because companies would pay additional payroll taxes.

Moreover, allowing ISOs to be subject to payroll tax withholding would encourage the IRS to require the withholding of income taxes on ISOs and to impose payroll and income tax withholding on non-qualified options.