A Dallas Startup’s Valuation Just Jumped 33% to $6.4 Billion. Two Stock Options Can Produce Completely Different Social Security Results
Exercising stock options before full retirement age can either leave your Social Security checks untouched or wipe them out for the rest of the year, and the difference comes down to one detail most employees overlook when they sign their…
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Dallas cybersecurity startup Island just raised another $400 million, lifting its valuation to $6.4 billion. At a private company growing that fast, employee stock options that looked like lottery tickets a few years ago can turn into real money.
Consider a 63-year-old employee at a company like that. He has already claimed Social Security, still works part time, and holds two grants: an incentive stock option (ISO) and a nonqualified stock option (NQSO).
Both grants use the same numbers: 5,000 shares, a $10 exercise price and a $50 current value. That makes each one worth a $200,000 paper gain. Exercising them can still lead to very different Social Security results.
Same $200,000 Gain, Two Opposite Payroll Results
Exercising an ISO generally doesn’t create regular income at the moment of exercise. Nothing new lands on his W-2, so the spread generally adds $0 to his Social Security wages that year.
The NQSO works differently. When he exercises, the spread becomes compensation income, reported on Form W-2 in Box 1 and Box 3 (up to the Social Security wage base).
| At Exercise | ISO | NQSO |
|---|---|---|
| Spread | $200,000 | $200,000 |
| Ordinary wage income | Generally none | Generally W-2 compensation |
| Social Security wages | Generally none | Yes, up to the wage cap |
| Main tax risk | Alternative minimum tax | Earnings test and payroll tax |
Why Age 63 Makes the Gap Matter
He was born in 1960 or later, so his full retirement age (FRA) is 67. Until then, Social Security’s earnings test applies. In 2026, the program holds back $1 for every $2 he earns above $24,480.
Say his part-time salary is $20,000. If he exercises the ISO, his counted wages stay around $20,000, below the threshold. His checks keep coming.
If he exercises the NQSO instead, his wages rise to $220,000. Social Security could keep back about $97,760 in benefits. For almost any retiree, that wipes out every check for the rest of the year.
Withheld benefits are not simply repaid later. At FRA, Social Security recalculates his monthly benefit to credit the months benefits were captured (we walked through the earnings test and three other traps that catch people who keep working in a free semi-retirement guide here: Retire Twice).
Older Option Grants May Get a Pass
IRS Publication 957 says an NQSO exercised in a year after the year it was earned can qualify as a special wage payment and shouldn’t be included in the earnings test, even though it still shows up as W-2 compensation. A grant linked to work from earlier years may not count.
The wage cap adds another layer. Social Security taxes earnings only up to $184,500 in 2026. Anything above that adds nothing to his earnings record. Three questions can each have a different answer: Is it compensation? Does it count for the earnings test? Does it raise his future benefit?
ISOs Bring Their Own Tax Bill
The ISO’s clean payroll treatment has a catch. The spread can count as an adjustment under the alternative minimum tax. He could owe real money in April on shares he hasn’t sold.
Selling shares later is a separate tax event. Growth after exercise is generally a capital gain, which never counts as wages for the earnings test. With ISO shares, the timing of the sale also decides whether he keeps the more favorable tax treatment.
Six Details to Get Right Before Exercising Anything
- Option type. Check the grant agreement to see whether it’s an ISO or NQSO, since that decides whether the spread becomes wages.
- Spread. Take the current value minus the exercise price, times your share count. For an NQSO, that’s the amount that can become W-2 compensation at exercise.
- Employment status. Find out whether you’re still working and whether the option compensation relates to current or earlier services.
- Year earned. Ask when the NQSO was earned. IRS guidance says an NQSO exercised in a year after the year it was earned can qualify as a special wage payment excluded from the earnings test.
- Current wages. Compare your salary with the $24,480 earnings-test limit and the $184,500 wage cap.
- Alternative minimum tax exposure. Run a projection showing how an ISO exercise changes your tax bill before you commit.
Mistake That’s Hardest to Undo
The most painful mistake is exercising an NQSO earned in the current year while collecting Social Security before FRA without checking how the compensation will be counted. One version leaves your checks alone. The other can stop them for a year and force you to rebuild cash flow around the gap.
Grant agreements, pay histories and birth dates vary from person to person, and each one can change the math. Have a tax professional run the numbers before you exercise, while you still have every option open.
Contact [email protected] for any questions or corrections.
Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
