Back in mid-October, just before the NASPP Conference, the SSA and IRS announced the cost-of-living adjustments for 2018. I had expected to get around to blogging about this sooner, but then the House released its version of the Tax Cuts and Jobs Act and the topic of tax reform and its potential impact on stock compensation eclipsed all other topics.
COLAs
I’ve provided a description of the adjustments that impact stock compensation below. Here is an IRS chart that provides a complete list of updates.
FICA
The maximum amount of earnings subject to Social Security tax will increase to $128,700 in 2018 (up from $127,200 in 2017). The Social Security tax withholding rate will remain at 6.2%. With the new wage cap, the maximum withholding for Social Security will be $7,979.40. [Note: The SSA has since lowered the wage base for 2018 to $127,400, resulting in maximum withholding of $7,960.80. See my December 12 update.]
Medicare tax rates also remain the same and are not subject to a maximum (the threshold at which the additional Medicare tax applies is likewise unchanged).
Highly Compensated Employee Threshold
The threshold level of compensation at which an employee is considered highly compensated for purposes of Section 414(q) will remain unchanged at $120,000 in 2018. This threshold defines “highly compensated” for purposes of determining which employees can be excluded from a qualified ESPP under Section 423.
Update on the Tax Reform Bill
And, for your tax reform fix, here is an update: the House passed its version of the bill and the Senate Finance Committee approved its version to proceed to the full Senate. Debate on the bill is expected to start in the Senate after Thanksgiving. One GOP senator (Ron Johnson, WI) has already said he won’t vote it and a few other GOP senators appear to be undecided. None of the Democrat senators are expected to vote for it, so the bill won’t pass if the GOP loses two more votes (at least not this time—they could always go back to the drawing board and bring a new bill to a vote).
The provisions in both bills that directly impact stock compensation are the same as they were last Thursday (taxing stock options at vest is out, Section 162(m) expansion is in, and tax-deferred arrangements for private companies are in).
For what it’s worth, GovTrack reports that Skopos Labs gives it a 46% chance of passing (as of November 20, when I last checked it).
Happy Thanksgiving!
This will be our only blog this week because of the holiday. I wish you all a happy Thanksgiving and I hope you have a celebration that is completely free from discussions of both tax reform and equity compensation.
Lately, there’s been a lot of speculation about what a Trump presidency and a Republican Congress means for tax rates in 2017. I got nothin’ on that. But what I do have for you today are some tax changes for 2017 that are already finalized.
New Filing Deadlines
Where nonemployee compensation is reported in box 7 of Form 1099-MISC, the deadline to file the form with the IRS has been accelerated to January 31 (previously the deadline was February 28, for paper filers, and March 31, for electronic filers). This will apply to Forms 1099-MISC issued to report compensation paid to outside directors, consultants, independent contractors, and other nonemployees.
Form 1099-MISC is also used to report income recognized on (i) stock plan transactions after an employee’s death, and (ii) transactions by an employee’s ex-spouse for stock awards transferred pursuant to divorce. In each of these cases, however, the income is reported in box 3, rather than box 7. Consequently, a Form 1099-MISC for these transactions doesn’t need to be filed until the regular February 28/March 31 deadline. (Assuming, of course, no other income is reported in box 7 of the form. For instance, if an employee’s ex-spouse provided services to the company as a consultant in 2016 in addition to exercising a stock option transferred to him in their divorce settlement, and the income for the consulting fees is reported in box 7 along with the option gain in box 3, the Form 1099-MISC would have to be filed with the IRS by January 31. And if the employee died in 2016 and hadn’t updated her beneficiary designation so her RSUs were paid out to the ex-spouse in addition to the consulting fees and the option gain…well, you get the idea.)
The deadline to file Form W-2 with the Social Security Administration has also been accelerated to January 31. These changes were part of the Protecting Americans from Tax Hikes Act and are intended to help prevent tax fraud. In the past, individual taxpayers received their copy of these forms before the IRS and could have even filed their tax return before the IRS received their Form W-2 or 1099-MISC. This could result in errors (inadvertent or intentional) that the IRS wasn’t able to catch until possibly as late as April, when the company filed these forms with the SSA/IRS. By then, a refund might have been issued to the taxpayer and the IRS was in the difficult position of trying to recover it. With the accelerated filing deadlines, the IRS will theoretically be able to catch these errors before refunds are issued.
The deadline for filing Forms 3921 and 3922 with the IRS is still February 28/March 31. Also, the deadline to distribute the employee copy of all of these forms is still January 31.
COLAs
The cost-of-living adjustments for 2017 have also been announced. Here are the highlights that related to stock compensation:
The wage base for Social Security is increasing to $127,200 (up from $118,500 in 2016). The Social Security tax rate isn’t changing (that requires Congressional action), so if I’ve done the math right (something you should never take for granted—math just isn’t my gig), the maximum withholding for Social Security will be $7,886.40 in 2017.
No changes to the Medicare rates or the threshold at which the higher rate kicks in, at least for now. Changing either of these things also requires Congressional action; while it’s certainly possible that a repeal or amendment of Obamacare might result in changes to Medicare tax rates or thresholds in 2017, it’s unlikely that either will change before the new administration begins.
The level of annual compensation at which employees can be considered highly compensated for purposes of excluding them from participating in a Section 423 ESPP will remain $120,000.
The Social Security Administration has announced that the maximum wages subject to Social Security will remain at $118,500 for 2016. The rate will remain at 6.2% (changing the tax rate requires an act of Congress, literally), so the maximum Social Security withholding for the year will remain at $7,347.
As noted in the SSA’s press release, increases in the Social Security wage cap are tied to the increase in inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. The Bureau of Labor Statistics found no increase in inflation over the past year based on this index, so there are no cost of living adjustments to Social Security benefits or the wage cap.
For those of you keeping score, the last time the Social Security wage base remained the same for a two years in a row was 2010 to 2011 (see “Social Security Wage Base Will Not Increase for 2011“), but in that year the Social Security tax rate was temporarily reduced.
A few other things that currently are not scheduled to change for next year:
The Medicare tax rates remain the same and there’s still no cap on Medicare. The wage threshold at which the additional Medicare tax must be withheld is still $200,000.
The flat supplemental rate is still 25% and the maximum individual tax rate is still 39.6%.
The threshold at which supplemental wages become subject to withholding at the maximum individual tax rate is still $1,000,000.
The compensation threshold at which an employee is considered highly compensated for purposes of Section 423 will remain $120,000.
Note that all of the above items can be changed by Congress and Congress has been known to sometimes make changes to next year’s tax rates very late in the year (e.g., see the 2011 alert noted above). But as things stand now, you have one less thing to worry about on your year-end checklist (but don’t forget that you still need to reset year-to-date wages/withholding back to $0 after December 31).
As the year draws to a close, now is the time to ensure the tax withholding ducks are all in a row. It’s far more challenging to correct tax withholding mistakes after year-end than before, so if there are any areas that need audit or attention, this is the moment of truth – you may still have a pay period to make those corrections. Along those lines, the IRS recently released additional clarification on procedures related to the additional medicare tax withholding that was implemented this year. In today’s blog I’ll highlight some highlights from the IRS’s Q&A.
A Quick Recap
To recap in a nutshell – we should all be aware by now that beginning January 1, 2013, an “additional” Medicare withholding tax went into effect for high earners. Essentially, employers need to collect an additional 0.9% of Medicare tax on wages in excess of $200,000. Ultimately the threshold for the tax to kick in is $250,000 of income for a married couple and $200,000 for individuals, but employers are not required to gather any information to determine the employee’s true liability. That at least keeps it easy – anything over $200,000 in wages will incur the additional tax from an employer perspective. That recapped, there are some nuances you’ll want to make sure you’ve accurately interpreted this year.
Employees can’t voluntarily increase their medicare withholdings
The IRS’s Q&A clarified that employees can’t request to increase their Medicare withholdings. Why would this be a question? I could see a family where two earners each make $150,000 in wages, but neither exceeds the individual $200,000 income amount that would trigger additional withholding by their employer. Together they make $300,000, so they would owe 0.9% in additional medicare taxes on $50,000 of income. One or both employees may consider approaching their employer close to year end to request additional Medicare taxes be withheld to satisfy the higher obligation they will have on their last $50,000 of combined income. The IRS has nixed the ability to do this. However, there may be a solution – employees can complete a W-4 Form to increase their income tax withholdings. They just can’t specifically request to withhold additional Medicare.
The definition of wages includes non-cash fringe benefits
Ensuring year-to-date income amounts are contemplated in withholding has long been a balancing act. The additional medicare becomes another tax where an income threshold must be monitored and considered. One important piece to remember is that non-cash fringe benefits are also included in the year-to-date wage threshold, so those components need to be included in any year-to-date income calculations. It may be worth checking with Payroll to ensure those fringe benefits have been included in year-to-date figures.
Employees will have to file Form 8959 with the IRS if additional Medicare tax is withheld
Even though employers will be reporting the Additional Medicare Tax on the employee’s Form W-2, employees will still need to file Form 8959 with the IRS to essentially reconcile their Medicare tax liability. This is where they would determine any additional amounts due, or any overpayments made. This is probably news to most employees, who probably haven’t considered that they will need to file any type of form reporting Medicare payments to the IRS.
Employers can’t stop withholding the additional Medicare tax once the $200,000 income threshold has been reached and withholding is required.
Once the additional Medicare tax kicks in, the employer cannot stop withholding that tax for the remainder of the calendar year. A likely scenario would be where an employee’s combined income with their spouse won’t exceed the $250,000 income amount for couples, but the individual employee’s income will exceed $200,000 and withholding of the additional tax is required for the spouse that will exceed $200,000. The employee may present a case that their combined income won’t trigger the tax, but employers will still have to withhold based on the employee’s individual income situation. The employee will need to complete Form 8959 to get a credit back for the additional Medicare withholdings. As far as I can tell, Form 8959 is still in draft form and the final hasn’t been released (please, someone correct me if that’s not the case).
Now is the time to ensure your withholdings are in order before the end of the year. You may also consider including some of the above points and examples in your year-end employee communications.
The IRS and the Social Security Administration have announced the COLAs for next year. That’s COLAs as in “cost of living adjustments” (in case you were wondering what the IRS and SSA have to do with soda pop).
A Quiet Year
Some years are quieter than others when it comes to tax-related changes. At this time last year we were looking at changes to FIT withholding rates, FICA withholding rates, a new Social Security wage cap, new Medicare taxes, a threshold increase relating to highly compensated employees, plus last minute tax legislation at the start of the year to restore some FIT withholding rates to 2012 levels. I count at least seven NASPP Blog entries on the tax rate changes that went into effect (and didn’t go into effect after all) at the start of 2013.
What a difference a year makes! Things are a lot quieter this year. At the federal level, it looks like the only change that impacts stock compensation is the Social Security wage cap. Bad news for Jenn and I since now we’ll have to come up with other ideas for six more blog entries but good news for you since you won’t have to sort through and implement a bunch of tax rate changes over the holidays.
FICA
As noted, the wage cap for Social Security tax purposes will increase to $117,000, up from $113,700 last year. The tax rate remains the same at 6.2%, so this increases the maximum Social Security withholding to $7,254 per employee. Incidentally, the SSA estimates that about 10 million workers will pay higher taxes as a result of the increase.
As far as I know, the Medicare rates and the threshold at which the additional Medicare tax applies will remain the same in 2014.
Highly-Compensated Employees
The threshold at which an employee is considered highly compensated for purposes of Section 423 will remain at $115,000 in 2014. (Section 423 allows, but does not require, highly compensated employees to be excluded from participation.)
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.
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!
In today’s blog, I provide an update on the status of FICA taxes as we head into next year and include a note from Alan Dye on the impact of Hurricane Sandy on EDGAR filings.
FICA Tax Increases for 2013 The Social Security Administration announced in a press release on October 16 that the annual wage base for Social Security tax is increasing to $113,700 in 2013 (up from $110,100 in 2012).
In addition, the current 2% rate cut for the employee portion of FICA is due to expire at the end of this year. If Congress doesn’t take action before the end of the year, the withholding rate for Social Security will return to 6.2% next January. If I managed to do the math correctly (something you should never take for granted), that will bring the maximum Social Security tax payment for 2013 up to $7,049.40. This is up from $4,624.20 this year, an increase of over 50%.
For the first time since I’ve started working in stock compensation, the Medicare tax is also increasing, at least for those in the top income tax brackets. As noted in my August 7 blog, “The Supreme Court and Stock Compensation,” wages in excess of $200,000 per year ($250,000 for married taxpayers that file jointly, $125,000 for married taxpayers that file separately) are subject to an additional .9% Medicare tax. Companies will apply the higher rate to any wages in excess of $200,000, regardless of the employee’s filing status and the rest will be sorted out when employees file their tax returns.
The additional Medicare tax applies only to employees; the company’s matching payment is not increased.
There are already a couple of threads started on administering the new Medicare tax in the NASPP Discussion Forum, see topics 7186 and 7354.
Highly Compensated Employees The wage threshold for which employees are considered highly compensated for purposes of Section 423 qualified ESPPs will remain at $115,000 for 2013.
Hurricane Sandy and EDGAR Filings Alan Dye notes in his blog on Section16.net that Hurricane Sandy is preventing folks on the East coast from submitting Section 16 filings and that the SEC was quick to offer relief. From Alan’s blog yesterday:
With Hurricane Sandy bearing down on DC and much of the Northeast, some filers and filing agents are having trouble getting to their offices to make Section 16(a) filings that are due today. The staff is taking an accommodating position for purposes of Section 16(a) and Item 405, saying that “For those affected by the hurricane — filers (or their lawyers/agents) along the East Coast — we won’t object if the filings that are due today are filed tomorrow (assuming that tomorrow is a day on which people can go to work). For filers not affected by the hurricane, then today is a regular business day and filings due today have to be filed today. So, this is effectively a no action position for only those filers (or their lawyers/agents) affected by the hurricane.”
Presumably filers not affected by the hurricane have no need for relief and will file on time. Filers scrambling to find a filing agent, though, now have some breathing room and can file tomorrow (assuming tomorrow is a normal business day). Thanks to the staff for getting on top of this issue quickly.
Hurricane Sandy and Option Exercises We also had a couple of threads started in the NASPP Discussion Forum on how employees that are up against the contractual expiration of their in-the-money stock options can exercise despite the market’s unexpected closure due to Hurricane Sandy. Here is a quick list of the alternatives:
pay cash for the exercise
net exercise
stock-for-stock or pyramid exercise
margin loan to be closed out when the market reopens and the stock acquired up exercise can be sold
loan from the company (if the optionee is not an officer or director) to be repaid as soon as the market opens and the stock can be sold
See NASPP Discussion Forum topics 7361 and 7362 for more information.
Two weeks ago, I discussed the Medicare tax rate hike that goes into effect next year (“The Supreme Court and Stock Compenation,” August 7). Today I discuss some additional considerations relating to that tax increase and other possible tax increases for 2013.
A Busier Second Half of the Year
Any time there is a tax rate increase on the horizon, tax advisors get on their soap boxes about accelerating transactions to take advantage of the current lower rates. In our world, that translates to employees possibly exercising their NQSOs this year, rather than waiting until next year or later.
Of course, here we’re only talking about an additional .9% in tax. Generally, tax considerations shouldn’t drive investment decisions and I would think that this is especially the case when we’re taking about such a small increase–on a gain of $1 million, that’s only $9,000 in additional tax. If you think the stock is going to increase in value, I’m not sure it’s worth it to exercise early just to save the $9K. But Jenn Namazi, the other half of the NASPP Blog, tells me that she has heard several advisors (including some very large, well-respected firms) suggesting this investment/tax strategy, so what do I know?
More Sales
In addition to NQSO exercises, you also may find more of your insiders selling stock in the latter half of this year. This is because, in addition to the rate hike I described last week, a completely new Medicare tax also goes into effect next year. This is a 3.8% tax that applies only to “unearned income” in excess of the same $200,000/$250,000 threshold. Unearned income sounds like something bad, like you it is income you don’t deserve, but it really just refers to income you didn’t earn by toiling away for your employer. Primarily, this is income from investments, such as capital gains realized on the sales of stock.
3.8% is a little more significant (actually about four times as significant) than .9% (it amounts to $38,000 on a gain of $1 million). On top of that, if Congress doesn’t take action to extend the Bush-era tax cuts, the long-term capital gains rate is going to increase from 15% to 20%. Consequently, long-term capital gains that would currently be taxed at 15% might be taxed as high as 23.8% next year. That’s the sort of tax rate increase that I expect to be more likely to change investment strategies.
Of course, there’s no tax withholding on long-term capital gains and this applies to the new Medicare supplement as well. There’s also no matching company payment, so the company doesn’t have any reporting or withholding obligations with respect to this tax.
But, where the sellers are executives, the sales could have other impacts to the company. At a minimum, the sales have to be reported for Section 16 purposes. And where executives have Rule 10b5-1 plans set up, you might find a flurry of changes to increase sales under these plans, which most companies would need to review/approve.
Shareholder optics are also a consideration; having several executives (or all executives) suddenly appear to be dumping company stock around year-end may not be the best thing for the company’s stock price. Your investor relations group may want to get out in front of this one.
Trivia question: Which major US Supreme Court decision this summer is going to impact tax withholding procedures for your stock plans next year?
If you guessed the decision on the Patient Protection and Affordable Care Act (President Obama’s healthcare reform package), you are a winner! 10 points to you!
What the Heck?
The reason is that the healthcare reform package increases Medicare taxes beginning next year (see my blog “One for You, Nineteen for Me–US Style,” July 20, 2010), which changes the rate at which Medicare needs to be withheld for stock compensation. With the Supreme Courts’ ruling, the new tax rates will now go into effect as planned. Even if Mitt Romney wins the presidency and does manage to repeal the entire healthcare package, he’s won’t take office in time to prevent the new Medicare tax rate from going into effect for at least part of 2013.
Another Tax Threshold to Track
Under the Act, Medicare will increase to 2.35%, but only for compensation in excess of $200,000 ($250,000 for married taxpayers that file jointly, $125,000 for married taxpayers that file separately).
If you are counting, this makes three separate wage thresholds that we need to track to properly withhold taxes on stock compensation:
Social Security: Applies only to wages under a specified maximum, currently $110,100, but this could increase for next year (but it is unlikely to increase to $200,000). All wages, both regular and supplemental, count towards this threshold.
Flat Supplemental Rate: When an individual has received $1 million in supplemental payments, tax on any additional supplemental payments must be withheld at the maximum individual tax rate (currently 35%, but this could increase to 39.6% next year–stay tuned on this one). Only supplemental payments, not regular wages, count towards this threshold.
Medicare: When an individual has received more than $200,000 in wages, the Medicare tax rate increases to 2.35%. All wages, both regular and supplemental, count towards this threshold.
Withholding Mechanics
Because you don’t know participants’ filing statuses (or their spouses’ incomes), you’ll withhold at the higher rate for any employees that have earned more than $200,000, even though they may not yet be liable for the additional tax. Any excess Medicare payments will be sorted out when they file their tax return.
Unlike the supplemental income tax rate, where you can apply the higher rate to an entire payment that straddles the threshold, the higher Medicare rate should only be applied to the portion of the payment that exceeds the threshold. For example, let’s say an employee that has received wages of $190,000 exercises an NQSO at a gain of $40,000. The first $10,000 of gain on the exercise is subject to the standard Medicare rate of 1.45%; only $30,000 of the gain is subject to the 2.35% rate. Then, from that point forward until the end of the year, any further NQSO exercises and award payouts are subject to 2.35% (as well as any other wages paid to the employee).
And, just in case that wasn’t confusing enough, the company’s matching payment remains at 1.45%; the additional tax applies to the employee only.
Next Steps and More Information
If you haven’t started talking to your payroll group about this, now might be a good time to take them lunch. It also might be a good time to ask your administrative provider about how they’ll handle the new rate in their system.
Also, tune in next week, when I’ll discuss planning considerations for employees.