For today’s entry, I have several follow-up items relating to a few of my recent blog entries.
Your Favorite Words 10 pts. to Sheila Jan of Life Technologies for accepting my challenge in “Holiday Fun” (December 18, 2012) and submitting her own favorite word with an example of how it might be used at a holiday gathering. Sheila’s submission:
Tranche: I’m going to help myself to a second tranche of the mashed potatoes!
A Little More on Excess Withholding Susan Eichen of Mercer reminded me that allowing employees to use share withholding to cover more than just the statutorily minimum required tax payment will trigger liability treatment under ASC 718, even if the proscribed W-4 procedures are followed (see my blog entry from last week, “Supplemental Withholding“). If the difficulty of the W-4 withholding process wasn’t enough, this makes one more reason to prohibit excess withholding for restricted stock and units (for NQSOs, where shares are generally sold on the open market, rather than withheld, to cover taxes, this is less of a concern).
Proposed Regs on New Medicare Tax The IRS has issued proposed regs on withholding the additional 0.9% Medicare tax that applies to wages in excess of $200,000 for individuals/$250,000 if married filing jointly. No surprises here, the procedures are as I described them back in August (“The Supreme Court and Stock Compensation“):
The company withholds the additional 0.9% tax on any wages in excess of $200,000 that are subject to Medicare, regardless of the employee’s filing status or wages paid to his/her spouse.
Any overpayments or underpayments as a result of the employee’s filing status/spousal income will be sorted out on the employee’s tax return. The company has no obligations here.
Employees can’t request that the company withhold additional Medicare tax (for example, if they have received wages of less than $200,000 but know that their wages, when combined with their spouse’s wages, will exceed $250,000). In this case, employees should submit a new Form W-4 to increase their withholding for federal income tax purposes. This will then offset the deficit in Medicare withholding when they file their tax returns.
Follow-up on Lawsuits Targeting Stock Plan Proposals On November 6 (“Martha Steward and Your Proxy Statement“), I blogged about a new type of shareholder lawsuit that seeks to extract plaintiffs’ attorney fees from companies by alleging that the disclosures in connection with their stock plan proposals (e.g., adopting a new stock plan or allocating shares to an existing plan) are inadequate. There now have been over 30 of these suits filed, with no end in sight as proxy season ramps up. We’ve posted a new alert, “Shareholder Lawsuits Target Stock Plan Proposals,” that collects several law firm memos on the suits as well as a interesting commentary on them from Stanford (“Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous?“). It’s worth your time to catch up on this issue.
Here’s what’s going on at your local NASPP chapter this week:
Orange County: Panel discussion facilitated by Deloitte and featuring representatives from Allergan and Edwards Lifesciences on how to address and manage mobile employees. (Thursday, January 17, 11:30 AM)
Silicon Valley: Valerie Diamond of Baker & McKenzie, Veena Bhatia of Gilead Sciences, and Tracy de Swiet at Cisco present “International Equity Updates: What’s New This Year.” (Thursday, January 17, 11:30 AM)
The end of 2012 marked many things (remember the fiscal cliff?), and among them was the conclusion of the year’s NASPP Question of the Week Contest. For those of you who are asking “What’s the Question of the Week Contest?”, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. There’s a new question each week, and a correct answer earns points.
And the Winners Are…
A big congrats to screen name alias edodge for coming out on top of our 2012 contest, with a score of 410. The screen names of the top 5 scorers are:
edodge (410 points)
mamaandmore (400 points)
Flower power121 (395 points)
DMekwunye (370 points)
CEP 1001 (365 points)
What’s in a Name?
In reviewing the scores from last year’s challenge, I couldn’t help but observe the originality of some of the screen names users are deploying in our contest. It seems nothing was off limits, from the range of “equity” and “stock” possibilities (Equidude, StockPrincess, Stockmonster, Stock Diva and so on) to a few that would probably require a happy hour and some time to explain. Some of my favorite screen names are:
Cabanaboy
honey badger don’t care
InCaseIFlunk
Stockless in Seattle
Guido
RU Crazy
Emily’s Tutu
I’m not suggesting that I understand what any of these screen names mean, but they did bring a smile or a laugh.
Play, Outwit, Outlast!
Are you missing out on the fun? Can out outwit your fellow stock plan professionals in a contest? We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game. Answers to the quizzes are found within any of the content on our web site, so if you don’t know one right off the bat, you can search our site. It’s a great way to test and hone your knowledge, week after week!
Stump Your Peers
If you really want to take the game to a new level, our Stump Your Peers feature allows you to submit your own question and answer for one of the weekly quizzes. You’ll get the credit, and, you can still take the quiz that week, giving you the advantage (since you’ll know the answer).
Membership
The weekly quizzes are only available to NASPP members, so renew or join today!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Will the new year mean a new job? Post your resume or your job opening in the NASPP’s new Career Center. While you’re there, the NASPP is hiring–check out our job posting.
Order the audio from the 20th Annual NASPP Conference! Just $65 per session for NASPP members–less per session if you purchase a multi-session package.
This week, I have a couple of updates on the tax rates and procedures for withholding federal income taxes on supplemental payments.
2013 Supplemental Withholding Rates When Jenn blogged about the American Taxpayer Relief Act last week, the ink was still wet on President Obama’s signature on the Act and we were all still trying to figure out exactly what it meant in terms of tax withholding in 2013. It now seems clear that the flat rate that applies to supplemental payments of $1 million or less per year will remain at 25% and the flat rate that applies to supplemental payments of more than $1 million has increased to 39.6%.
ADP has confirmed these rates and, while that isn’t quite the same thing as the IRS confirming them, my sense is that ADP knows what they are talking about, their confirmation agrees with my understanding of how these rates work, and it agrees with what I’ve heard from other practitioners (e.g., Baker & McKenzie), so I’m considering this issue put to rest.
No Other Rate is Allowed While we’re on the topic of supplemental rates, a question I get frequently is whether companies can permit employees to request that taxes on their stock plan transactions be withheld at a higher rate than the prescribed flat rate. This was a topic of two of my earliest blog entries (“Excess Tax Withholding,” December 1, 2008 and “Excess Tax Withholding – Part 2,” December 9, 2008).
In September of last year, the IRS issued Information Letter 2012-0063 confirming that when you are using the flat rate (regardless of whether you are choosing to use the flat rate over the employee’s W-4 rate on an optional basis or the employee has received over $1 million in supplemental payments for the year and you are required to withhold at the maximum rate), you are required to withhold at the specified rate (25% for optional flat rate withholding, 39.6% for mandatory flat rate withholding). From the IRS’s discussion of optional flat rate withholding:
“If the employer is using the optional flat rate withholding method, the employer must withhold at the optional flat rate and cannot take into account requests by the employee that the rate be increased or lowered. Only one rate applies for purposes of optional flat rate withholding on supplemental wages.”
Where employees have received more than $1 million in supplemental payments, you have to withhold federal income tax at 39.6% on their stock plan transactions–no other rate (either higher or lower) is permissible.
Where employees have recieved $1 million or less in supplemental payments, the only way to withhold federal income tax at a rate of other than 25% is to use the employee’s W-4 rate (which the IRS refers to as the “aggregate procedure”). In that case, you could have the employee complete a new W-4 requesting the higher rate for federal income tax purposes just prior to his/her stock plan transaction and then complete another W-4 resetting the FIT rate back to the prior rate after the stock plan transaction is concluded (without the second W-4, the higher rate will apply to all of the employee’s regular pay). But then you’d have to figure out the W-4 rate–good luck with that.
Where you don’t want to deal with the hassle of figuring out W-4 rates, you can offer employees two other alternatives when they are worried that the withholding on their stock plan transactions isn’t sufficient:
Increase the withholding on their regular pay (which does require a new W-4, but at least you don’t have to be involved).
Make estimated payments to the IRS.
The information letter doesn’t provide any information on what the penalties would be if you do withhold at a different rate without following the W-4 procedure or whether those penalties would apply to the company or the employee. For now, those mysteries remain unsolved.
The DC/VA/MD NASPP chapter will host its annual holiday meeting on Thursday, January 10 at 5:30 PM. Carol Bowie of ISS, Amy Goodman of Gibson Dunn, and Keir Gumbs of Covington & Burling will present “Preparing for the Proxy Season.” A networking reception will follow the presentation.
On New Year’s Eve, as I was watching the various countdowns and celebrations on TV, I couldn’t help but notice the volume of interruptions and the stark contrast of “serious” reporting going on about the fiscal cliff negotiations. It was like watching two different television shows at once: celebrate, fiscal cliff, celebrate, fiscal cliff. All that reporting did lead to somewhere this time – a deal was eventually reached and passed shortly thereafter (formally known as “The American Taxpayer Relief Act 89-8”). Sorting through the outcomes has become the next challenge at hand. In today’s blog I’ll attempt to provide the current lay of the land for tax withholding in 2013.
For Many, A Reprieve
One of the big stories of the fiscal cliff doom scenario was that not only were some tax cuts expiring, but that there were so many of them slated to change all at once. The Bush Era income tax rates were set to expire and revert upward. The Social Security payroll tax holiday was coming to an end. New medicare rates were set to be introduced in 2013 for high earners and on certain types of income. So what’s the bottom line? What changed and what didn’t? The good news for many taxpayers is that it’s not as bad as it could have been, though some taxes will still increase. Higher earners will be impacted more, with increased federal rates.
Federal Withholding Rates: The American Taxpayer Relief Act effectively maintains the reduced income tax rates adopted in 2001 and 2003 for individuals earning up to $400,000 and families earning less than $450,000. Income above those levels will be taxed at 39.6%, up from 35%.
Social Security: The end of the road has come for the Payroll tax holiday of 2011 that was eventually extended through 2012. That means the 4.2% employee withholding rate that’s been in effect for the past two years has returned to 6.2% effective January 1, 2013. Employers have until February 15, 2013 to implement the new rate and until March 31, 2013 to make any adjustments related to rate implementation post effective date.
Medicare: The new medicare tax rate previously enacted remains in force and unchanged. Essentially, for income over a certain threshold, an additional 0.9% in medicare tax is withheld beginning with tax years after December 31, 2012. For more details, click here or visit our Tax Withholding and Reporting Portal.
Supplemental Income Withholding Rates: At this point, our eyes are looking for additional guidance from the Treasury Department on the status of supplemental income withholding rates. Our current thought is that the rate for supplemental payments below $1 million will stay at 25%, since this is tied to the third highest individual tax rate (which didn’t change), but that the rate for supplemental payments in excess of $1 million will increase to 39.6%, since this is tied to the highest individual tax rate. This interpretation is not based on any guidance from the Treasury, and we’ll have to wait until they release more information to confirm this component.
Timeframe to Implement
Companies have until February 15, 2013 to make the changes to withholding rates. It may make sense to move forward in making changes to known rates (like social security and medicare) as quickly as possible, and wait a bit longer to change other rates until the Treasury has issued further guidance on how the supplemental (and other) rate(s) will be affected. The IRS did release Notice 1036, which is essentially contains the rate tables to guide withholding for 2013, but that was on New Year’s Eve, before the Act was passed. As a result, their 2013 tables will need to be updated to reflect the withholding rates that are now in effect.
The NASPP is Hiring!
On a completely separate note, the NASPP is hiring! Check out our job listing in the NASPP Career Center for additional information.
I wish everyone a happy, healthy and prosperous new year!