Nike Just Reworked Its Employee Stock Purchase Plan. A Retiree Can Report W-2 Income From the Shares That Social Security Doesn’t Count as Wages

Nike shareholders approved an amended employee stock purchase plan on Sept. 8, which tacked on 16 million shares authorized for issue. The plan lets eligible employees buy Nike (NYSE:NKE | NKE Price Prediction) stock through payroll deductions. For many current and former workers, that plan is how a big part of their savings got built.

A hypothetical 63-year-old former Nike employee bought shares for years through the company’s qualifying Section 423 plan, the IRS-approved type that allows a purchase discount and special tax treatment. Now he receives Social Security and wants to sell some shares. Part of the sale shows up as ordinary compensation income on a Form W-2.

His first thought makes sense: W-2 income must count against Social Security’s earnings limit. Federal law says otherwise. It specifically leaves income from qualifying stock purchase options, and from selling the shares bought with them, out of Social Security’s definition of wages. That money can land in Box 1 of his W-2 without ever becoming Social Security wages.

Box 1 and Box 3 Tell Social Security Different Stories

A W-2 separates pay into categories. Box 1 shows income subject to federal income tax. Box 3 shows Social Security wages. For most workers, the two numbers are close, so people treat them as identical.

IRS Publication 15-B says income from a qualifying plan sale can be reported in Box 1. Pay from exercising a Section 423 option, or from selling the resulting shares, is excluded from Social Security and Medicare wages. The earnings test uses Social Security’s own legal definition of wages, and Section 209 of the Social Security Act carves out exactly this income.

How $20,000 on His W-2 Counts as Zero for the Earnings Test

Say $20,000 of his sale is reported as ordinary income in Box 1. Social Security treats that as $0 in wages and counts nothing toward the earnings test.

Now give him a part-time job paying $20,000. The Box 1 income he sees adds up to $40,000. Only the job wages matter for the earnings test, if he has no other earnings.

In 2026, someone below the age for full benefits for the whole year can earn $24,480 before Social Security withholds $1 of benefits for every $2 above that line. His job leaves him $4,480 under the limit, so he loses nothing.

If he wrongly counted the full $40,000, he would expect about $7,760 in reduced benefits, a fear that could lead him to cut hours or delay the sale when neither step was necessary.

Why Only Qualifying Plans Get This Break

This treatment applies to qualifying Section 423 employee stock purchase plans, while other forms of equity compensation follow different payroll-tax rules. Non-qualified stock options, restricted stock units, and other equity awards can be treated differently for payroll taxes and generally can produce Social Security wages.

Holding periods matter too. A sale is qualifying only if shares were held at least two years from the grant date and one year from purchase. Qualifying and disqualifying sales calculate the ordinary-income portion differently, but either way, that compensation can appear in Box 1 while staying out of Social Security wages.

His Income Tax Bill Still Feels the Sale

Keeping the income out of Box 3 protects him only from the earnings test. The ordinary-income portion still counts toward federal taxable income, and any gain from price growth after purchase is taxed as a capital gain.

That creates a second Social Security effect. The IRS uses combined income, generally adjusted gross income (AGI) plus tax-exempt interest and half of Social Security benefits, to determine how much of the benefit is taxable. For a single filer, benefits start to become taxable above $25,000. Above $34,000, up to 85% of his Social Security benefits can become taxable. A large sale can make more of his benefit taxable even though it never impacts the earnings test.

Records to Pull Before Selling a Single Share

1. Check the plan paperwork to confirm the shares came from a qualifying Section 423 plan.
2. Purchase records: Find the price paid and date. These set both cost basis and ordinary-income amount.
3. Holding period: Determine whether the sale is qualifying or disqualifying, since the two use different formulas.
4. His W-2: Compare Box 1 with Box 3 rather than assuming every Box 1 dollar counts toward Social Security.
5. Other earnings: Wages or self-employment income can still trigger the earnings test, even when stock income cannot.

Two Numbers on One Form, Two Different Audiences

A W-2 usually looks like proof of earnings. With qualifying stock purchase shares, that approach fails. The sale can put income in Box 1, leave Box 3 untouched and give Social Security a very different number from the one on his tax return.

The priciest mistake is easy to miss: working less or holding shares longer than planned to avoid an earnings-test penalty that doesn’t apply. Phasing out of work has its own tax quirks worth knowing (we mapped four of them in a free semi-retirement playbook), but the ESPP earnings-test worry isn’t one of them. For these shares, the number that matters to Social Security may not be the income in Box 1 at all. It may be the wage amount that never reaches Box 3.

Contact [email protected] for any questions or corrections.