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.
For today’s “Meet the Speaker” interview, we feature an interview with Rive Rutke of Deloitte Tax, who will lead the session “Equity & Employment Tax: A Marriage Made in Heaven.” Here is what Rive had to say:
NASPP: What are a few key areas your panel will address with respect to stock compensation and employment taxes?
Rive: Our panel will discuss some of the U.S. and global issues relating to audit exposure pertaining to equity compensation compliance. We will also highlight the challenges of managing global withholding obligations related to ASC Topic 718–and provide insight into how three issuer companies manage global withholding rates, in light of ASC 718.
NASPP: What common mistake do companies make and how can they avoid it?
Rive: A common mistake companies make is not adhering to the rules regarding the timing of payroll deposits–both in the US and globally. We are prepared to review some of these rules during our session so that common mishaps can be avoided.
NASPP: What is the silver lining to your employment taxes?
Rive: The silver lining is that once issuer companies are aware of the rules and regulations, positive action steps can be taken which can increase compliance and reduce risk.
NASPP: Tell us three things people don’t know about you.
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.
Perusing our NASPP Q&A Discussion Forum, it’s interesting to see the various trends in terms of hot topics and where companies seem to be struggling the most in administering their stock programs. We don’t keep official statistics about the types of questions asked, but one constant trend I see is the dominance of questions around taxes, taxes, taxes. In today’s blog I identify some of the key areas of uncertainty for issuers and helpful resources to address them.
Too Much Mobility
Let’s face it: it’s more common for a company to be spread across the country or the globe than not these days. With expanded presence comes mobile employees, and multiple jurisdictions that would love to get their hands on tax revenues. For a long time the term “mobility tracking” often conjured images of remote, distant countries around the globe. While that clearly is an area of challenge and still an ever hot topic in administering equity plans, we’re definitely seeing lots of questions around domestic mobility (state-to-state within the U.S.). Some of the more common inquiries stem around employees moving from one state to another and the question of which state rules to follow in terms of withholding, and who gets those dollars. The answer is not necessarily black and white, and can largely depend upon the individual states involved (and their regulations), where the employee was located when a key event occurred, such as vesting or exercise. Some key tips to remember are:
You only have to withhold in a particular state if you have an office there. No office, no withholding required, at least for stock compensation. So if your mobile employees are also remote employees, this may simplify the process of figuring out where to send tax dollars.
When in doubt, call on the local payroll contacts in the state in question. If you’re working in the corporate office in California, your California payroll folks may not be fully aware of the nuances involved in withholding taxes in Pennsylvania. However, if you also have an office in Pennsylvania and local payroll contacts, it’s definitely worth a consultation with them on mobility issues.
Leverage your third-party payroll provider for assistance. While they may not be mobility experts, they should be well versed in the withholding requirements for each state. Knowing the basics can go a long way towards figuring out next steps.
Consult with an expert. If you have a large mobile population, or significant tax dollars involved, it may be worth consulting with a third party expert who is familiar with the ins and outs of mobility tracking. There are several firms who will even handle the calculations for you, as events occur.
Access available information, such as the articles in our State Taxes or Global Stock Plans Portals. If you’re an NASPP member, access is free, so why not use those as a starting place?
As with any compliance issue, there is always the risk/reward analysis. Things like the number of states involved, the aggressiveness of the states in pursing tax revenue, the number of employees and tax amounts are all considerations in determining a withholding practice for mobile employees.
Terminations and Other Situations
One thing to remember is that one size does not fit all then it comes to taxation. It’s easy to assume that jurisdictions (domestic and global) may have similar practices or requirements when it comes to certain situations, such as termination, but that’s not always the case. In the U.S. we don’t distinguish between a terminated employee or an active employee for stock related withholding purposes. In fact, even terminated employees receive a W-2 documenting their stock compensation income, even if they haven’t worked for the company in the calendar year of the taxable stock event. Then, you go outside the U.S., to a country like the U.K., where tax withholding does change for terminated employees. In the U.K. the rate is reduced to a flat rate that is less than standard withholding rate for active employees. So employes with terminations in that jurisdiction need to be attentive to ensuring tax withholding rates are changed for terminated employees. I’ve seen companies “forget” this, and have to go through the painful process of processing refunds to terminated employees. Judging from the number of questions about withholding in the U.K. for terminated employees, this is still an area where companies need a sanity check. Here are a couple of tips for monitoring tax compliance when scenarios change:
If you have a third party expert, use them. Don’t skimp when it comes to compliance. I like to say a penny spent today is a dollar saved down the road; investing in compliance should pay off – the penalties for non-compliance would likely be far greater. One thing you’ll want to double check with your expert is how changes in circumstances will affect withholding. I recommend a standard set of questions that you use to explore the requirements with your provider that includes identifying any nuances for terminations, divorce, death and other scenarios.
Build a solid process to monitor circumstantial changes on a real time basis. It’s easier to give back money for over-withholding than it is to seek out money for under-withholding, especially if you’re dealing with former employees. Still, it’s even better to get it right from the beginning. This will undoubtedly require careful coordination with other internal business partners, like H.R. and local contacts.
Bounce it off of someone else. Although each company should do their own due diligence when it comes to tax compliance, leveraging the experience of other practitioners can be a great resource. Don’t be afraid to turn to your peers – at an NASPP chapter meeting, via the NASPP Q&A Discussion Forums, in educational settings and through other industry events. As a whole we all become more educated the more information we share.
Taxation has been a topic of much discussion for as long as I can remember, and likely will remain that way into the distant future. There are just too many jurisdictions, volumes of requirements, and then frequent changes. This is a recipe for an active discussion forum for a long time to come. Keep those questions coming: the more we collaborate together, the more we continue to progress in building a well oiled tax compliance machine.
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.
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.
Mastering ESPP and RSU Withholding Outside the United States By Jennifer Kirk and Narendra Acharya of Baker & McKenzie
In today’s world, your company cannot afford to be noncompliant with its global stock plan withholding and reporting obligations. On a daily basis, we hear about the fiscal challenges affecting governments around the world. In addition to the cutbacks of programs and increased taxes and fees, governments remain focused on greater enforcement of existing tax obligations. In a number of countries, revenue collected from employer tax withholding (including employer and employee contributions to social taxes) is often the largest source of tax revenue–but still not sufficient. Whether through increased frequency of payroll audits, hiring more specialized teams of auditors, and/or more robust or extra reporting requirements, it is reasonable to expect that stock plan withholding practices will be facing increased scrutiny on a global basis.
As a general example, in December 2010, the UK tax authorities (HMRC) published a discussion document aptly titled “Improving the Operation of PAYE – Collecting Real-Time Information.” Not content to rely on payroll filings, which may only be made annually, and the periodic audit, HMRC in the discussion document envisions a process where it is electronically notified whenever payment is made to an employee and would confirm that the appropriate income tax and social taxes (National Insurance Contributions) have been deducted. The latest version of the discussion document no longer contains the more controversial proposal of having the compensation funds flow from the employer to HMRC (as a “central calculator” and disbursement agent) and then to the employee. Regardless of the outcome of the proposals, they are a great example of government’s focus on getting the money sooner and greater review of payroll calculations.
While a “central calculator” may not be imminent in the UK, even the current employer withholding and reporting requirements in the UK, as an example, can be challenging. First, there are additional reporting requirements beyond traditional payroll reporting that apply to equity compensation plans. This includes the annual share schemes return (Form 42) where the details of equity grants need to be specifically reported. The HMRC is then better able to cross-check the annual payroll reporting done by the UK employer to confirm that the taxable amount of equity compensation is indeed reported (and withheld upon) correctly. Second, there are timing requirements such that if the appropriate UK tax is not collected within 90 days, the employee is deemed to receive an additional benefit from the employer equal to the tax that should have been withheld, but on a grossed up basis. In short, noncompliance in the UK can be quite expensive.
During the 19th Annual NASPP Conference, the session “Mastering ESPP and RSU Withholding Outside the United States” will answer the key questions: the who, what, where, why and how of withholding for global stock plans. Don’t allow your company to be an easy target for foreign governments seeking tax revenue, as the penalties (and unwelcome scrutiny from foreign tax agencies) will be a much greater burden than ensuring that it gets done correctly in the first place.
Managing a global equity compensation program entails helping your non-U.S. employees overcome the significant barriers to understanding and accessing their stock compensation. Non-U.S. employees may have to absorb information in a language they aren’t comfortable with and embark on a business relationship with a U.S. broker in addition to the more universal challenge of conceptualizing compensation that does not come in the form of a simple paycheck.
One of the issues that only your non-U.S. participants will face is keeping their W-8BEN current with their broker. I say keeping it current because most, if not all, brokers have incorporated the submission of an initial W-8BEN into the account activation process.
Backup Withholding
Brokers are required to ask for a SSN–or taxpayer ID–when individuals open a new account. If the SSN is missing or incomplete, brokers must process backup withholding, which is 28% through 2012, on any transaction. However, a W-8BEN is a form that establishes an individual (or organization, really) is both not a U.S. resident or citizen and not subject to tax on income that would otherwise be taxable in the United States. Most importantly for your non-U.S. employees, the W-8BEN confirms that shares sold through their U.S. brokerage account are exempt from backup withholding.
Once and Again
Once a person has a U.S. taxpayer ID or SSN, it’s permanent. Being exempt from backup withholding, on the other hand, is not a static status. Therefore, a W-8BEN expires at the end of the third calendar year after it was completed and a new one must be signed in order to continue to be exempt from backup withholding. No matter how the W-8BEN is completed, this can be confusing. A broker can remind employees of an impending expiration, but not to force them to complete it.
Backup Plan
If you have non-U.S. employees, it’s important to coordinate with your broker on how to handle expiring W-8BENs. Your broker can help you identify and target employees with communications. You can even set up a post-transaction verification process to try and catch employees with expired W-8BENs before backup withholding is actually remitted to the IRS. However, you should still have a backup plan for how your company will handle situations where backup withholding has passed the point of no return. Once tax withholding has been remitted to the IRS, the only person who can get the funds back is the individual. Having a protocol in place for how much hand-holding the company will do.
Back Again
In order for your employee to recover backup withholding, she or he must file a tax return, which means a SSN or tax ID is required. Your employee may complete a Form W-7 and submit it along with the tax return, which would most likely be the Form 1040NR-EZ if the backup withholding is the only reason your employee is filing.
If you have more questions about managing a global stock plan, find the answers you need in the NASPP’s Global Stock Plans portal.
The details surrounding exactly when tax deposits are due on stock compensation come up regularly in the NASPP Discussion Forum. In honor of our NASPP Ask the Expert’s webcast today on Restricted Stock and Unit Awards, I’d like to summarize the issue.
IRS $100,000 Deposit Rule
Most public companies that offer stock compensation are semi-weekly filers, meaning they must make tax deposits with the IRS two times each week. These deposits are due within three business days after the deposit period. For example, if your period includes Tuesday, Wednesday, and Thursday, then the tax deposit for those three days would be due the following Wednesday. This is the company’s normal deposit schedule.
However, once the total tax liability reaches $100,000 for any corporate entity the deposit is due the next business day. (See IRS Publication 15.) For example, if the entity’s total tax liability reaches $100,000 on a Tuesday, the IRS would expect that deposit to be made on Wednesday of the same week. For those of you keeping score, the total tax liability to the IRS includes all taxes that get reported on the company’s quarterly tax return–Form 941. That is the total of income tax and both employee and employer Social Security and Medicare after adjustments, although that is more of a detail for the payroll team than for stock plan managers. Also, the liability only accumulates beginning after a deposit period. For example, if your deposit period includes Tuesday, Wednesday, and Thursday, then you do not need to combine Thursday’s liability with Friday’s liability.
T+4
The IRS issued a Field Directive in 2003 instructing IRS auditors not to challenge tax deposits from “broker-dealer trades” (i.e., broker-assisted cashless exercises) made the business day after the settlement of the exercise, provided the settlement is no longer than three days. This doesn’t change companies’ tax deposit timeframe; it simply instructs auditors not to challenge these deposits. In spite of this technicality, most companies rely on this Field Directive for remitting taxes to the IRS on all same-day sale NQSO exercises.
Restricted Stock
RSUs and RSAs are where stock compensation and tax deposit liability get really tricky. There isn’t any specific rule, regulation, or even Field Directive or instruction that specifically addresses how to handle the timing of the tax deposit due on restricted stock. Rather, it’s the fact that it isn’t addressed as an exception that is most important. Until or unless it is addressed, it’s safest for companies to assume that the income for deposit timing purposes is paid out on the vest date. If the vest date falls on a day when the total tax deposit liability reaches $100,000 or more, the taxes from that vesting event are due to the IRS no later than the following business day.
Penalties
Yes, there are penalties for late deposits. Yes, the IRS does audit this. It is true that there are companies who still do not make timely deposits intentionally because they either can’t figure out how or have determined that the cost of compliance is higher than the potential fines. However, the penalties range from 2% to 15% of the late or unpaid tax amount, which could be very expensive if late deposits are a regular occurrence. Remember that the late deposit is the entire amount due, not just the amount in excess of $100,000. Of course, there are a litany of approaches to try and get the penalties reduces or recalculated. However, even if your company is successful at reducing the amount due it still has to pay someone to negotiate with the IRS and that does not come cheaply, either.
Time Crunch
The reality is that your payroll department needs processing time and your payroll service provider requires processing time. There is pretty much no way for you to send tax amounts to your payroll team after the close of market on the day that restricted stock vesting events have created a next-day deposit liability for your company and actually have that deposit made to the IRS before the close of business the next day.
So, aside from defining the FMV for restricted stock vests as some component of trading value three days prior to the vest, how do you make a timely tax deposit and avoid the penalties? Although it isn’t the only possible approach, the most common method for compliance according to the NASPP’s most recent Quick Survey on Restricted Stock is to estimate the tax liability in advance of the vesting event and then make corrections after the actual tax liability is known.