The NASPP Blog

December 17, 2008

Tax Reporting Follow-Up Items

This week I have a few follow-up tax items from the NASPP’s 2nd Annual Webcast on Tax Reporting.

Overpayment of Social Security Tax

During the webcast, I explained that when a company overwithholds on Social Security tax for an employee, it is the company’s responsibility to refund the overpayment to the employee through payroll. This is different than income tax, where, if the company overwithholds, the employee receives a refund when she files her tax return at year-end. 

One listener asked about a situation where an individual works for multiple companies during the year and, as a result, ends up paying too much Social Security tax. For example, let’s say an employee pays the maximum amount of Social Security while working for Company A  and then goes to work for Company B.  There’s no way for Company B to know that the employee has already paid the maximum required Social Security for the year and, thus, Company B will begin withholding this tax from the employee.  But, the fact the employee is now working for a new company doesn’t increase the amount of Social Security tax she has to pay.  In this situation, there is a special form the employee can file with her tax return to receive a refund of the Social Security tax withheld by Company B.  Note, however, that there’s no way for Company B to recoup the matching amounts it paid on the Social Security tax collected from the employee.

Code Y

It’s come to my attention that Code Y is now in effect for Form W-2 reporting for 2008. This code is used in Box 12 to report income that is subject to a valid deferral election under Section 409A (e.g., income on RSUs subject to deferred payout). Use of the code was suspended last year, but it is now in effect and the Instructions to Form W-2 for 2008 have been updated to include an explanation of how to use it.

See More on Code Y for an update to this item.

FICA Taxes and Short-Term Deferrals for RSUs

Another topic I discussed during the webcast was the tax treatment of RSUs in which payout is deferred beyond the vest date.  This situation bifurcates the tax withholding: FICA taxes must be withheld at vest but income taxes are not withheld until the underlying shares are paid out.  One of our listeners pointed out, however, that deferrals that fall under the “short-term deferral” rule are an exception to this treatment. Generally, to comply with Section 409A, payout of RSUs must be via a formal deferral election that is subject to numerous restrictions or must be mandated under the terms of the arrangement (also subject to numerous restrictions).  But, under the short-term deferral rule, payout can be deferred until two and a half months after the end of the calendar year in which the RSU vested without any formal election or mandate under the terms of the arrangement.  Where payout is deferred under this rule, not only is income tax withholding deferred, but the company can also choose to defer collection of FICA withholding to the payout date as well.  If the company is going to defer collection of FICA withholding, it should apply this policy to all employees participating in the plan and to all similar plans that it offers.

If you missed the webcast (or had to leave early, since it went a bit longer than anticipated) you can listen to the full audio archive (or just the parts that you missed) at Naspp.com.  Robyn and I are hard at work on the transcript and hope to have it posted in the next week or so. 

Guest Author Next Week

I’m going to be out on vacation for the next two weeks, so Robyn Shutak, NASPP Education Director, will be blogging in my place.  I hear she has some pretty interesting ideas for her entries, so make sure to tune in for them.

Last Chance to Participate in the International Stock Plan Design and Administration Survey

This week is your last chance to participate in our International Stock Plan Design and Administration Survey.  Don’t put it off any longer–you must start the survey by this Friday, December 19, if you want to participate.  So long as you start the survey by December 19, we can give you to January 2 to finish it up, but we need you to have at least started it by Friday.  I strongly urge anyone with non-US stock plan participants to complete the survey; this is a very valuable resource, easily worth the cost of NASPP membership, but only a high rate of participation by our members will make the results useful.  If we don’t get sufficient participation, we may be forced to release the results to only those companies that participated in the survey.   

Reason #6 to Renew Your NASPP Membership:  The NASPP Q&A Discussion Forum

The NASPP Q&A Discussion Forum is one of the most active and informative discussion forums I’ve ever seen.  Almost every question is answered and many have two or three responses (and some have quite lengthy exchanges between members).  Check it out today and, while you’re there, post your own question and respond to someone else’s question. 

NASPP “To Do” List

We have so much going on here at the NASPP, it can be hard to keep track of it all, so I’m going to keep an ongoing “to do” list for you here in my blogs. 

– Barbara