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.
It’s that time of the year – holidays, festivities and year-end prep. I’ve often wondered how the two can go hand in hand. In today’s blog I’ll combine the two; let’s see how that works out.
Send Your Holiday Selfies
Let’s get the fun out of the way first. Chapter holiday gatherings are already in full swing, and we want to see your photos. Send me your selfies and group photos – we’ll post them to our Facebook page. Some of them might even make it into a holiday oriented future blog post. The pictures are already coming in – see anyone you know from yesterday’s San Diego chapter holiday event? Hint: Raul Fajardo of Qualcomm and James Tozer of E*TRADE.
Year-End Prep Tips
Moving on to the more serious topic of year-end. It seems like it always creeps up on us – one minute we’re celebrating and the next it’s full throttle into year-end reporting, tax and proxy season. To get ahead of the game, I thought of a few things you can do now, in December, to prepare.
1) Audit non-employees in your recordkeeping system. Non-employees who had stock compensation transactions this year will need a Form 1099-MISC. This is not to be confused with “former” employees, who will still receive a Form W-2. In many organizations preparation of 1099 forms is not handled by Payroll, so you’ll want to make sure you know who your non-employees are (including outside directors) and have that list ready come January for whomever is going to prepare the forms.
2) Attend our webcast next week (Thursday, 12/12) on Annual Tax Reporting. This will feature essential information on 6039 reporting, special reporting requirements, non-employee reporting and other detailed tax reporting instructions. This is a prime opportunity to get the lay of the land heading into tax season.
3) Revisit deferred tax withholdings (e.g. FICA on retirement eligible RSUs). If you’ve delayed collection of FICA taxes until year-end, for example (based on the IRS’s Rule of Administrative Convenience, allowing deferral of collection of some taxes until calendar year-end), you’ll want to revisit those scenarios now to determine whether any tax withholding is required before year-end. In relying on the Rule of Administrative Convenience, the idea is that taxes like social security will have reached their annual maximum withholding for many employees by now, eliminating the need to collect any additional social security – meaning none would need to be collected for the award. However, if an employee has not reached the maximum and collection of such taxes were deferred under the rule, then you’ll need to make sure you adequately withhold by 12/31.
Well, there you have it. Festivity and planning tips all in one blog. The holiday season is off to a great start. I’m looking forward to seeing everyone’s photos, and I’m wishing you a smooth sailing process as you kick off year-end as well.
Many companies are in the throes of year-end related activities. If your fiscal year ended on December 31, then you have the double duty of year-end financial reporting tasks combined with U.S. tax reporting requirements. Typically when I think about “year-end” and all the associated to-dos, things like W-2s, 1099s and participant communications are the first things that come to mind. In thinking further, I realize my perspective is a bit narrow. It’s a big world out there, and, for companies with employees outside of the U.S., there are additional reporting tasks associated with all the various non-U.S. jurisdictions that must be completed. In today’s blog I highlight some thoughts and tips for complying with year-end reporting requirements in non U.S. jurisdictions.
Thanks to a recent article published by Jones Day, available in our Global Stock Plans portal, I’ve been able to refresh my understanding on several key aspects of global year-end reporting compliance. I’ll focus on some general tips that came to my mind; country specific detail is available in the article and I’ll leave it to the law experts to share those tidbits.
It’s a Big World Out There
Yes, it’s true, the U.S. is not the only jurisdiction that requires year-end tax reporting related to stock plan transactions. I find that working in the U.S., it’s natural for us to be more intimately in the know when it comes to U.S. tax reporting compliance. However, as we know, there are many other locations that have similar reporting requirements. It’s important to understand which countries have existing legislation or measures and then formulate a plan to comply. Will a local resource be tasked with compliance? Will this be outsourced to a third party? Will corporate representatives facilitate such reporting?
Not All Tax Years Are Created Equal
One challenging aspect of managing stock compensation globally is the individuality of each global jurisdiction and their securities, tax, labor and other laws and requirements. These challenges remain consistent in the year-end reporting process as well. Not all tax years end on December 31. In fact, it’s common to see tax years ending in April, June and other parts of the year. For example, Australia’s tax year ends on June 30th. India’s tax year ends on March 31st. In some ways varied year-end dates may lessen the calendar year end burden placed upon stock administrators, payroll personnel, and others who work in managing global operations. However, it can be tricky to keep track of the multiple dates, deadlines and corresponding requirements. If you have employees with reportable transactions in multiple countries, you may want to create a global tax reporting calendar for the purpose of tracking important deadlines and requirements.
When You Assume…
There’s an expression about making assumptions, but in order to keep things professional I can’t write it here. If you’ve heard it, you know what I mean (and if you haven’t, I’ll be happy to share it with you offline). Anyhow, assumptions can lead to failures, and those of the compliance kind we certainly want to avoid. I’ve seen it happen many times – an assumption is made that local payroll is handling stock compensation related tax reporting. The problem? Payroll didn’t know they were supposed to do it, or, in some cases that there was even a requirement to report. Other possible vulnerabilities can be found in withholding rates (some locales have different rates for different situations, such as for current and terminated employees). While in many cases, local resources may know more about their own reporting requirements than those in the corporate office, it’s unwise to assume that everything will happen autonomously at the local level as intended. Even if you plan to have local resources handle the bulk of tax reporting and other year end compliance tasks, plug yourself in. Get involved and understand exactly what is being reported, for whom, and by when. This may involve internal business partners and external advisers with expertise in this area, and cross-communication is important.
Back to Work
I know we could talk for days about the extent and complexity of managing global stock plans, but alas it’s time to get back to work. I wish everyone a smooth year-end process, whenever that “year-end” may be.
Is your calendar full for January yet? As we head into the new year, now is a good time to touch base with other departments that you work with throughout the year to review procedures and plan for the coming year. In today’s blog, I discuss a few of the groups you might want to meet with. Looks like it’s going to be a busy month…
Payroll
Schedule a meeting with payroll to kick off the start of the year. A few items for the meeting agenda include reviewing W-2 reporting procedures for various stock plan transactions (see our “Form W-2 Reporting Checklist” and “W-2 and 1099 Reporting for Equity Compensation – FAQs“); reviewing tax rate and limit changes for the upcoming year; and reviewing current procedures–what’s working and what isn’t working.
Accounts Payable
Forms 1099-MISC are typically prepared by accounts payable. If you grant equity to outside directors and other non-employees, it’s a good idea to meet with this group to ensure that any of their taxable stock plan transactions for the year will be reported appropriately. Ditto for any taxable transactions that occurred after the death of an employee or subsequent to the transfer of options/awards pursuant to divorce.
Accounting/Finance
For calendar year-end companies that haven’t done so since last year, now is a good time to review your valuation assumptions (volatility, dividend yield, interest rates, and expected life) for stock option grants. It’s also a good time to revisit the expected forfeiture rate applied to options and awards. Set up a meeting with accounting/finance to have a conversation about this. If you’ve had unusual transactions that occurred during the year (acceleration of vesting, changes in employee status, option exchange programs, other option/award modifications), it’s a good idea to review how these transactions are accounted for as well. You don’t want any surprises when your auditors review your financial reports.
Legal/Finance
You’ve probably already done this if your company has a calendar year-end, but if you haven’t, you’ll want to schedule a meeting with the folks responsible for preparing your company’s Form 10-K and proxy solicitation statements to ascertain what your contributions will need to be. Reviewing last year’s statements to remind yourself of the information included relating to stock compensation can be a good preparatory step for this meeting. It’s also a good idea to review the number of shares available in your stock plans, expected share usage for the next two years, and plan expiration dates, so you’ll know if a shareholder proposal relating to your stock plans is necessary.
HR
Review your current grant guidelines with HR to determine if any tweaking is necessary and to find out if HR has planned any changes to your equity programs for the next year.
Brokers
With cost-basis reporting going into effect for the first time with 2011 Forms 1099-B, you’ll want to meet with your brokers to find out what will be reported as the cost basis for stock issued under your stock plans and what information they will be providing your employees about the new reporting procedures. See my November 30, 2010 bog, “Four Questions to Ask Your Brokers.”
Section 6039 Service
If you plan to use an outside provider to prepare and/or file Section 6039 returns with the IRS and provide statements to employees, don’t wait any longer to get the conversations with your provider started. The deadline for employee statements is January 31!
International Advisors
If you offer stock compensation to non-US employees, it’s a good time to check in with your external advisors for international compliance to find out if any local requirements have changed and if there are any year-end reporting requirements you need to comply with outside of the United States. Where US employees have relocated to other countries, or foreign nationals have moved into the United States, also review the US tax reporting requirements with respect to these folks (even for foreign nationals that moved back out of the US by the end of the year).
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.
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.