Do I Pay Self Employment Tax On Exercised Nonqualified Options?

[ResponsibleCitizen]

In 2019, I exercised options which were granted to me by a company for which I'm not an employee; I get a 1099-MISC from them each year.  It's my understanding that these are nonqualified options, and the difference between what I paid and their estimated value appeared on my 1099-MISC in Box 3 (Other Income).  It wasn't clear from the instructions for entering a Box 3 value into TurboTax whether I should treat this as self employment income or not (like the value I usually get shown in Box 7 of the same 1099-MISC).  Do I have to treat this "fake" income (since I didn't get a dime in actual cash!) as self employment income, and (presumably) pay Social Security and Medicare taxes on it?  Or do I enter it in some other way?  (I think I saw in one of the TurboTax help boxes I tried opening that I could delete this separate 1099-MISC entry and enter it elsewhere, but, again, it wasn't clear whether I should or not.)  Thanks!

[RobertG]

Yes, they are subject to self-employment tax.

Once you exercise your non-qualified stock option, the difference between the stock price and the strike price is taxed as ordinary income.

This income is usually reported on your paycheck, but since you are not an employee, it was reported on a 1099. 

The sale of the stock after an option is exercised is then reportable as capital gain or loss.

The FMV on the exercise date becomes the purchase price or cost basis of the shares for purposes of determining gain or loss.

If the shares are held for at least one year after exercise, the proceeds constitute long term capital gain or loss to the taxpayer.

If the shares are sold within one year or less from the exercise date, the proceeds constitute short term capital gain or loss to the taxpayer.