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Tax Questions, Answered

Author: Barbara Baksa, Executive Director, NASPP

In light of the upcoming tax season, there has been a lot of tax related questions that have popped up on the NASPP forums.  Here is a preview of answers to some of the more frequently asked questions that have been asked:

Former Employees

You have to withhold taxes on option exercises by and award payouts to former employees and report the income for these stock plan transactions on a Form W-2, no matter how long it has been since they were employed by the company. The only exceptions are:

  • ISOs exercised within three months of termination (12 months for termination due to disability).
  • RSAs paid out on or after retirement (because these awards will have already been taxed for both income tax and FICA purposes when the award holders became eligible to retire). Likewise, RSUs paid out on or after retirement that have already been subject to FICA are subject to income tax only.

If the former employees did not receive regular wages from the company in the current year or the prior calendar year, US tax regs require you to withhold at their W-4 rate, not the supplemental rate. In my experience, however, few companies are aware of this and most withhold at the supplemental rate because the W-4 rate is too hard to figure out.

Changes in Employment Status

Where an individual changes status from employee to non-employee (or vice versa) and holds options or awards that continue to vest after the change in status, when the option/award is exercised/paid out, you can apportion the income for the transaction based on years of service under each status. Withhold taxes on the income attributable to service as an employee (and report this income on Form W-2).  No withholding is necessary for the income attributable to service as a non-employee (and this income is reported on Form 1099-MISC).

Any reasonable method of allocating the income is acceptable, so long as you are consistent about it.

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