---
title: ESPP (employee stock purchase plan) — what it means and why it matters | Allocate AI
description: A benefit that lets you buy your company's stock through payroll deductions at a discount, often 15% below the market price.
canonical: https://allocateai.io/glossary/espp
site: Allocate AI — https://allocateai.io
---

# ESPP (employee stock purchase plan)

A benefit that lets you buy your company's stock through payroll deductions at a discount, often 15% below the market price.

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.

## Related terms

- [RSU (restricted stock unit)](https://allocateai.io/glossary/rsu) — A promise from your employer to give you shares of company stock on a future date, as long as you are still there when that date arrives.
- [Capital gains (short-term vs long-term)](https://allocateai.io/glossary/capital-gains) — Profit from selling an investment for more than you paid; gains on assets held over a year get lower tax rates than gains on assets sold sooner.
- [Cost basis](https://allocateai.io/glossary/cost-basis) — What you paid for an investment, including fees, or the value you were taxed on when you received it; the starting point for measuring gain or loss.
- [Diversification](https://allocateai.io/glossary/diversification) — Spreading money across many investments so that no single company, industry, or country can sink your whole plan.

**Plan in plain language.**

Allocate answers “can I afford this?” from your own numbers, writes the plan, and stages every change for your yes. It starts from an estimate before you link a bank.

[Get started](https://app.allocateai.io/signup)

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Allocate AI is a budgeting and financial-planning app: link your accounts, say what you want in plain words, and it writes the plan and stages every change for your approval. Read more at https://allocateai.io or see all pages in https://allocateai.io/llms.txt.