It’s that time of the year again…actually, I wonder how many times during each year we say that…(“it’s that time of the year…time for year-end”, “it’s that time of the year…time for 6039 reporting”, “it’s that time of the year…proxy time”). Ah, but I digress. The time of the year I’m talking about today is “tax time”. I just finished compiling a mountain of paperwork and explanations for my accountant and was painfully reminded of just how much paperwork we do receive in preparation for our tax returns. I started to wonder – are your employees lining up at your doorway with questions? Have your communications been sufficient to anticipate and address their likely questions? In today’s blog I explore some of the key misconceptions that employees develop at tax time when it comes to reporting their stock transactions.
Employee Misconceptions
Thinking that restricted stock unit/awards been reported and taxed based upon the sale of shares. If you don’t believe me, just visit Turbo Tax’s question forums. Employees are out there complaining that the sale has not been properly recorded on their W-2. This points to needing clearer communication about what exactly gets recorded on the W-2, and there the company’s obligation to report stops.
Assuming all cost basis information for stock plan shares is recorded on the new 1099-B. Since this is a fairly new reporting requirement, and the rules only apply to stock that was acquired in 2011 or later, it’s a common possibility that not all transactions will have accurate cost basis information on the 1099-B. Employees need to be able to distinguish between transactions and know exactly what the broker is reporting. The 1099-B originates from the broker, so stock administrators should be aware of how the broker is explaining this to employees. Even though issuers aren’t tasked with preparing these forms, you’re likely to get questions about them. Sometimes a simple factual reminder that “anything before 2011 may not be on there” can go miles to clearing up confusion.
Not understanding which ESPP dispositions are recorded on their Form W-2. In theory employers should be recording both qualified and disqualified dispositions for Section 423 plans on the employee’s W-2. The reality is not all employers report qualified dispositions. The employee will get a Form 3922 from the company for the year of the purchase, and then a 1099-B from the broker for subsequent sales. Those are important pieces of information, but also of importance is the portion of income recorded on the W-2. If employees fail to recognize the W-2 component, they run the risk of paying double taxes.
There are many mistakes and assumptions that employees can make in preparing their tax returns. These misconceptions or misunderstandings can vary by employee level of understanding, advice received from advisers and other factors. Stock administrators can mitigate some of these misconceptions by anticipating common areas of assumption and developing an FAQ to proactively head off or clarify areas of question. You may not be tax advisers, but you can certainly help employees to avoid a mountain of misunderstanding, leading to costly mistakes during tax time. For sample communications and other ideas, visit our Tax Withholding and Reporting Portal.
As our faithful readers know (because we’ve certainly harped on this topic enough), 2011 Forms 1099-B (which brokers will be sending out shortly) are subject to the new cost-basis reporting requirements. We’ve posted some resources to help you understand the new requirements and help you get a start on materials explaining them to your stock plan participants. In today’s blog entry, I highlight the new (and a few old) materials now available on Naspp.com.
Reporting Examples
We’ve created the following reporting reporting examples. Each example includes an annotated Form 1099-B, Form 8949, and Schedule D so you can see how sales of shares acquired under the various scenarios will appear on each of these forms:
We’ve also posted a sample FAQ on the new cost-basis reporting requirements and the new Form 8949. It even includes an annotated Form 8949. Use this as a starting point for your own FAQ for your stock plan participants.
We’ve also posted a sample email that might be sent to employees to alert them to the dangers of not verifying that the cost basis reported on their Form 1099-B is correct.
Flow Charts
Last year, we created the renowned Section 6039 flow charts (one member told us these charts alone made membership worth the cost), which explain how employees can use Forms 3921 and 3922 to report sales of shares acquired under ISOs and ESPPs on their tax returns. Those flow charts have now been updated for the new Form 1099-B and Form 8949. In addition, we’ve created flow charts for NQSOs and RS/RSUs.
For your employees, myStockOptions.com is a great resource, offering illustrated and annotated tax forms, FAQs, and numerous articles on how employees should report sales of stock on their tax return.
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 I keep an ongoing “to do” list for you here in my blog.
Yesterday, I had the opportunity to participate in a Computershare FreeSMARTS webcast with my NASPP colleagues Danyle & Robyn on insider trading compliance policies. Preparing for this webcast gave me the perfect excuse to peruse some of the policies available on the web. Our sister site, TheCorporateCounsel.net has a fantastic list of example policies in the Insider Trading Policy practice area.
One aspect of the insider trading policy that stock plan managers might be expected to participate in is employee education and communication. I’m a big fan of quizzes to supplement standard education practices, particularly because they provide a means to gage the effectiveness of your program. Insider trading is an area that is perfect for a situational quiz–one that gives employees a situation and asks whether or not it is a case of insider trading. This type of a quiz is very much like an interactive FAQ and requiring employees to stop and actually consider their answers helps them apply the concepts to their own jobs and circumstances.
Today I want to share with you a bit of what I uncovered in the process of preparing for this presentation:
MyStockOptions.com offers a quiz on insider trading that serves as a general knowledge poll. These are questions that all of your employees should be able to answer, including the question on penalties for insider trading. It’s important for every employee to understand the potential sanctions that are the teeth behind insider trading regulations.
Smart Money recently published an intriguing article on the advantages of making insider trading legal. One of the hypothetical scenarios from this article was among the questions posed to two leading law professors in this follow-up article. The responses to some of these questions demonstrate the difficulty inherent in a vague set of regulations such as what we have with insider trading.
Finally, in reviewing some posted insider trading policies on company websites, Boeing’s FAQs really stood out to me as a stellar example of a short set of questions that clarify what actions might constitutes insider trading. If you are looking to build a quiz, questions like those provided by Boeing are a great place to start.
Of course, you don’t need to create FAQs or quizzes in-house. There are a number of service providers who specialize in HR training, including insider trading, if you have even a relatively small budget for it.