The NASPP Blog

All this talk of tax withholding got me thinking about the reconciliation challenges that surround your employee tax withholding on equity compensation. As your Payroll team prepares to send out Form W-2s or 1099s, and their equivalents internationally, the stock plan management team should be involved in efforts to confirm the income and withholding amounts for stock plan transactions. This can be a pretty daunting task if you’ve saved it all up for the end of the year, so hopefully you have been reconciling periodically throughout the year. You may be able to find some relief with employees in countries where the tax year does not end in December (such as the UK); these employees may be set aside until after you have reconciled for the deadlines coming up immediately in the new year. Here are some areas that you should focus on:

Income Reported

You will want to make sure that the income amounts reported in each payroll system match the income amounts reflected in your stock plan administration database. If your company is tracking different sources of income separately (restricted stock vs. options or ESPP), then the separate sources will need to be balanced separately. However, the total income amounts should also be reconciled as a confirmation. Pay special attention to employees who may have transferred between payroll groups during the year. This would include not only your globally mobile employees, but also local transfers or administrative transfers (for example, if you have a subsidiary locally or if employees from an acquisition stayed under their own payroll for a period of time). You will want to confirm that no employee income has fallen through the cracks or been double-reported. However, in the case of income from globally mobile employees, you may have situations in which the double-reporting of income is correct and intended, which you will need to also track and confirm.

Tax Withholding

Reconciling the tax withholding amounts can be trickier than reconciling income. This is because there are more situations in which the amount of withholding reported should not equal the amount actually withheld at the transaction because of an administrative policy. For example, there are U.S. states where withholding amounts are difficult to determine in advance (like Kentucky) where your company has chosen to true-up through payroll. This is also true internationally; your company may be withholding at a higher rate on the transaction and then refunding excess through the local payroll either because you have implemented a foreign disbursement process that requires a 100% sell or because you have difficulty obtaining individual tax rates. Hopefully, your company has thoroughly researched these decisions and is not creating unnecessary exposure by withholding shares in excess of statutory minimums or other issues on excess withholding (see Barbara’s past two blog posts here and here). You should know in advance what these standard exceptions are and account for them in the reconciliation process.

There are also the unusual exceptions (typically, these are mistakes that have been made). These may include over or under withholding from timing issues on communicating capped social taxes between payroll and stock plan services or situations where an incorrect tax withholding was made and later corrected through either payroll or stock plan services, but not both. You should be identifying and resolving these throughout the year, but also keeping a list for your reconciliation. Sometimes, the reconciliation itself brings these issues to light!

Special Circumstances

There are circumstances like death, divorce, change in status between employee and non-employee participant, and cross-border income and taxation that may require special attention during your reconciliation. In the case of the death of a U.S. employee, you should not be withholding federal income tax on any transactions executed by the estate or beneficiary. You should only be withholding FICA on transactions that take place in the same tax year as the death, and the FICA amount should be reported on the employee’s final Form W-2. Divorce is a little more complicated depending on the divorce settlement arrangements. Be sure that you are carefully tracking any options in which the company’s withholding obligations have been impacted from the divorce–have them flagged in some way and have a notification policy in place for both parties should they transact on those grants. When an employee becomes a contractor or non-employee director (or vice versa), you will need to pay close attention to how the income and tax withholding is handled. This reconciliation process is a good time for you to confirm that you have not withheld on non-employee income for these individuals. You will also need to divide the W-2 income from the 1099 income when reconciling. Cross-border income reporting and tax withholding can be complex. Whatever your policy has been on reporting and withholding for cross-border situations, you will need to set these aside and reconcile them separately at year-end.

Whatever your process is, start early and engage your payroll team(s) as early in the year as you can. For more information on tax withholding, check out our Tax Withholding and Reporting portal. Also, if you missed Barbara Baksa and Robyn Shutak’s 2nd Annual Webcast on Tax Reporting this week, keep an eye out for the transcript and materials to be posted on our Audio/Video Webcasts Archive. All NASPP members should be taking advantage of these free webinars–it’s a fantastic perk to your membership! Our next webinar is on December 18th and will be presented by Frederic W. Cook: Moral Hazard and Executive Compensation – Balancing Risk and Reward.

You can find more information about good practices for year-end in the NASPP’s Year-End Procedures portal. Also, Robyn Shutak and I will be presenting a FreeSMARTs webcast on year-end reporting next Wednesday, December 17th at 1:30 pm EST. Register with Computershare here.