The NASPP Blog

Tag Archives: medicare

November 4, 2010

Employment Tax Audits

The IRS began its Employment Tax National Research Project (NRP) this year (See our January 26th blog entry), auditing 2,000 randomly selected companies. Soon, the next 2,000 will be receiving their notices that they have been selected for 2011. In totally, the IRS will audit 6,000 companies over three years. This NRP comes on the heels of similar studies conducted on Subchapter S Corps in 2003 and 2004 and individual taxpayer returns from 2006 to 2008 returns). All are part of a Department of the Treasury’s commitment to provide updated estimates of the “tax gap” (i.e.; the difference between the taxes owed and the taxes actually collected). A full description of the efforts is included in the Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance.

Don’t think that if you aren’t selected, you’re totally off the hook. These are just the random audits as a part of the evaluation process. Not only are regular tax audits still taking place, the results of the NRPs will be used to help identify which individuals and companies to target for regular audits and what areas of audits are most likely to result in the discovery of noncompliance.

The current NRP will focus on four main issues: fringe benefits, worker classification, executive compensation, and payroll taxes. The stock plan management team won’t have much, if anything, to do with an audit of fringe benefits. Worker classification (i.e.; determining if there are consultants who should be classified as employees) could spill over into stock plan administration. A quick review of your company’s policy on granting to nonemployees and an audit of the database to identify grants to nonemployees will help your company make a full assessment of classifications. Executive compensation sounds like an area that stock plan management would be involved in, but actually the main focus will be on owner-officers and the particular audits in this area may not apply to most corporations. So, the area where the stock plan management team can provide the most assistance is payroll taxes.

Payroll Taxes

At this point, you should already have a regular, at least annual, audit of your tax withholding and remitting policies that helps you identify areas of potential noncompliance. The NRP only increases the risk of your company being audited, but compliance should be a serious focus, regardless. Here are my top areas to review before the new year:

Timing of Tax Deposits
Social Taxes
Mobile Employees
ISOs and 423 ESPPs
162(m) and 409A Compliance

Why Now?

If you uncover areas where the company is not withholding correctly on equity compensation, the beginning of the calendar year is the perfect time to implement new withholding practices. This is especially true for mobile employee withholding and if the change will be prospective only

How Far Should You Go?

When you do identify an area that your company has been out of compliance with, the big question is whether to make policy changes that are prospective or retrospective. Even if you aren’t going to be changing retrospectively, it’s a good idea to at least audit back a minimum of three years, but no specific length of time is appropriate across the board. For example, if you discover that you haven’t been making timely tax deposits, there isn’t a way for you to go back in time and make them any earlier. But, you can go back and audit the instances of noncompliance to help give your company an idea of what fees could result from an audit.

States, Too!

The federal government isn’t the only one with a tax gap to close; states are also looking to find lost tax revenue. What’s more, the IRS has reciprocal agreements with many states to share audit findings. That means that if you are audited by the IRS as part of the NRP or as a regular audit, state and local tax authorities may not be far behind.

-Rachel

Tags: , , , , , , , , ,

May 13, 2010

Options and Divorce

Options Transferred Subsequent to a Divorce

When all or a portion of a nonstatutory stock options is transferred to the former spouse of one of your employees subsequent to a divorce, there are no income reporting or tax withholding obligations on the transfer. However, the exercise of those option shares requires special handling by the company.

When an incentive stock option is transferred in a divorce settlement, it no longer qualifies for preferential tax treatment. Once the ISO has been transferred, the income reporting and tax withholding obligations are the same as for NSOs. However, if the transfer of the shares happens only at exercise, then the ISO shares maintain their preferential tax treatment. The transfer of the shares at exercise does not constitute a disqualifying disposition. The transferred shares are then subject to the same holding requirements from the date of grant and exercise to determine if the sale is a qualified or disqualified disposition.

Revenue Rulings

There are two important revenue rulings that govern the income reporting and tax withholding on options transferred pursuant to a divorce.

Revenue Ruling 2002-22 establishes that a transfer of nonstatutory stock options as part of a divorce settlement does not constitute an income event. For stock plan managers, this means that there is no need to establish the fair value of the option, report any income, or withhold any taxes on the date of transfer. It also establishes that the former spouse realizes income on the exercise of those option shares.

Revenue Ruling 2004-60 clarifies the withholding and reporting obligations for an exercise made by the non-employee former spouse of options that were transferred in a divorce settlement.

Withholding and Reporting at Exercise

So, we know from Revenue Ruling 2004-60 that the former spouse realizes income at the exercise of options transferred pursuant to a divorce. What’s more, FICA and FUTA are both applied to the income at exercise. But, don’t worry; you won’t need to collect a Form W-4 from the former spouse. The income and FICA tax rates are applied based on the employee’s supplemental income and the Social Security tax she or he paid in that tax year as of the exercise date.

When the former spouse exercises the option, the company withholds income, Social Security, and Medicare from the exercise proceeds based on the employee’s withholding rates. The income tax withholding is attributed to the former spouse, but the FICA taxes are attributed to the employee even though they are paid by the former spouse. The income (i.e.; spread at exercise) and the income taxes withheld are reported on a Form 1099-MISC to the former spouse. That same income amount is reported to the employee as Social Security and Medicare wages on Form W-2. Additionally, the Social Security (if applicable) and Medicare withheld are reported on the employee’s Form W-2. For a great example of this, see our Tax Withholding on Option Exercises Subsequent to Divorce alert. You can also find more information in these recorded webcasts: Death and Divorce: The Lighter Side of Equity Compensation and The 2nd Annual NASPP Webcast on Tax Reporting.

Last Chance for Special Conference Rates

Registrations for our 18th Annual NASPP Conference are pouring in! If you haven’t already registered, don’t miss out on the special $200 discount on registration fees. This special rate is only available through tomorrow, May 14th!

-Rachel

Tags: , , , , , , , , , , , ,