An employee stock purchase plan takes a set percentage of each paycheck, holds it for an offering period (usually six months), and then buys company shares for you at a discount, most often 15% off. Many plans add a lookback, which means the discount applies to the lower of the price at the start or the end of the period.
The math is generous. Put in $10,000 over six months, and with a 15% discount you receive shares worth about $11,765 on purchase day. If you sell right away, that is roughly a $1,765 gain for holding cash for an average of three months. With a lookback and a rising stock, the gain can be much larger. The IRS caps purchases at $25,000 of stock value per calendar year.
Taxes depend on when you sell. Sell immediately and the discount is ordinary income, with any extra movement taxed as a capital gain. Hold for two years from the offering date and one year from purchase, and part of the gain can become long-term capital gain instead.
The common mistake is skipping the plan because the paycheck deduction feels tight, or buying and then forgetting, leaving a large slice of net worth in one employer's stock. A simple approach many people use: contribute the maximum, sell on purchase day, and move the money to wherever the plan says it goes.