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Category Archives: Tax

January 11, 2018

IRS Announces 2018 Withholding Rates

Earlier today, the IRS issued Notice 1036, which updates the tax tables and withholding rates for 2018 to reflect the new marginal income tax rates implemented under the Tax Cuts and Jobs Act.

The flat rates that apply to supplemental payments are updated as follows:

  • For employees who have received $1 million or less in supplemental payments during the calendar year, the flat rate is 22% (the third lowest income tax rate).
  • For employees who have received more than $1 million in supplemental payments during the calendar year, the flat rate is 37% (the maximum individual tax rate).

As under prior rules, for employees who have received $1 million or less in supplemental payments, the company can choose to withhold at either the flat rate or the W-4 rate (which also changes as a result of Notice 1036). Where employees have received more than $1 million in supplemental payments, this choice is not available; the company must withhold at the specified flat rate (now 37%).

While companies have until February 15 to implement the new rate tables, the IRS encourages companies to implement them as soon as possible and I expect that many companies will switch to the new flat rates immediately. Where shares are being withheld to cover taxes, withholding at greater than 37% could now trigger liability accounting.

– Barbara

P.S. Thanks to Andrew Schwartz of Computershare for alerting me to the IRS’s announcement.

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January 3, 2018

Be Suspicious

What would you do if you got an email from your CEO, asking you to provide a report of taxable income, including employee IDs—stat? A) Respond with the requested information as quickly as possible or B) be very suspicious?

As it turns out, you should be very suspicious.

Phishing Scheme Targets Payroll and HR

Most phishing schemes have little to do with stock compensation, but a scheme that the IRS has issued an alert on in the past hits a little close to home.  This scheme targets payroll and HR personnel. The scammer sends an email that purports to be from the company’s CEO or other executives and requests that the recipient provide employee data, including personal and W-2 information.

If successful in acquiring this information, the scammer then submits false tax returns (possibly with both state and federal tax authorities) and collects on any refunds due to employees.

According to the IRS, the email may include the following (or similar) requests:

  • Kindly send me the individual 2017 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review
  • Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as at 2/2/2017.
  • I want you to send me the list of W-2 copy of employees wage and tax statement for 2017, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.


It seems to me that the big giveaway here is the use of the word “kindly” in the above requests. What executive ever used that word when asking for a report ASAP?

Let’s Be Careful Out There

Payroll and HR aren’t that far removed from stock plan administration. Some of you probably wear both hats.  It’s always a good idea to verify any unusual requests from executives and to make sure that any personal data for employees, including compensation data, is transmitted in a secure manner, especially if that data includes employee identifiers, such as names and ID numbers.

You also might want to make sure your colleagues in payroll and HR are on alert for this scam. It’s more widespread than you think and it’s a mess to resolve; you don’t want it to happen to you or your fellow employees.

– Barbara

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December 21, 2017

Tax Withholding in 2018

On Wednesday, the final version of the tax reform bill was passed in both the House and Senate. There were a few small changes to the bill at the last minute, but none of them impact what I wrote about on Tuesday. Since the bill changes individual tax rates, some of you may be wondering if you need to update your withholding rates on January 1.

It’s Still Just a Bill, Sitting There on Capital Hill

Hold your horses, there, buckaroo.  If you are old enough to remember Schoolhouse Rock’s I’m Just a Bill, you know that the passage of a bill by Congress doesn’t make legislation a law (unless the bill has already been vetoed by the president and two-thirds of Congress votes for it). The legislation still has to be signed by the president. Although Trump’s signature seems like a formality with the tax bill, it still has to happen (rules are rules); moreover, there is speculation that the bill won’t be signed until January (“It’s Unclear When Trump Will Actually Sign the Tax Bill,”

Tax Withholding Rates for 2018

Most of the provisions in the bill, including the new individual tax rates, are effective as of January 1, 2018.  This does not mean that you have to rush to update tax withholding rates, however (especially if the bill hasn’t been signed into law as of January 1). The IRS has to issue guidance updating the tax rate tables and withholding procedures before you can withhold at the new rates. Of course, the IRS can’t issue any guidance until the bill becomes law (and if the looming government shutdown happens, this could impact how quickly the IRS can issue its guidance). The following announcement is posted to the IRS website:

The IRS is continuing to closely monitor the pending legislation in Congress, and we are taking the initial steps to prepare guidance on withholding for 2018. ‎We anticipate issuing the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February. The IRS will be working closely with the nation’s payroll and tax professional community during this process.

Your payroll provider should be a great resource when tax withholding rates change, since this will impact all compensation subject to withholding, not just stock compensation. An announcement on the ADP website notes that companies should continue to apply 2017 withholding rates until the IRS issues new guidance (“Federal Tax Reform Legislation May Be Imminent: Impact to 2018 Payroll Calculations May Be Delayed“)

Thanks to Marlene Zobayan for bring this concern to our attention.

Transactions on December 31, 2017

As a reminder, transactions that occur on December 31, 2017 are still occurring in the 2017 tax year, even if the FMV for these transactions isn’t known until market close on December 31 (market close does not mark the end of the tax year) and even if the transactions aren’t settled until 2018 or the shares acquired under the transactions aren’t issued until 2018. Most companies have to complete a special payroll run in the first week of 2018 to add late December transactions to Forms W-2.

With tax rates changing for 2018, it is especially important to include transactions in the correct tax year. Failure to do so could cause employees to underpay or overpay taxes due on the transaction and underpayments could be subject to penalties. (Remember that even though the withholding rate may not change until February, withholding is only an estimate of employees’ tax liability. Their actual liability will be based on the rate in effect at the time of their transaction; any excess withholding will be refunded to them when they file their tax return.)

This is a good reason to avoid scheduling vesting dates for December 31; see the November-December 2016 NASPP Advisor for nine more reasons to avoid December 31.

– Barbara

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December 19, 2017

Tax Reform: The Final Scorecard

The conference committee charged with aligning the Senate and House versions of the Tax Cuts and Jobs Act announced late last week that they have come to an agreement. The final bill is expected to be approved in both the House and Senate this week and then signed into law by the president.

Here’s where the bill ended up with respect to the provisions that impact stock compensation.

Individual Tax Rates: The final version of the bill released by the conference committee largely matches what was in the Senate version, except that the maximum individual tax rate is reduced to 37%. So we end up with seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest rate kicks in at $500,000 of income for single taxpayers but at only $600,000 for joint filers (instead of the $1 million threshold that was originally proposed). The individual tax rates sunset after 2025 and will revert back to the current rates at that time.

Supplemental Withholding Rate: For employees who have received supplemental payments of $1 million or less during the year, the supplemental rate is tied to the third lowest individual tax rate, which will be 22% under the aligned bill. For employees who have received supplemental payments of more than $1 million during the year, the rate is tied to the maximum individual tax rate, which will be 37%.

AMT (for Individuals): This is probably the closest we’ve come to a repeal of the AMT (at least in my memory) but still no cigar. The bill does increase the exemption amounts and phaseout thresholds, so fewer taxpayers will be subject to the AMT. These changes sunset after 2025.

Corporate Tax Rate: Reduced to 21% with no sunset.

Estate Tax: Increases the estate tax threshold to about $11 million; no repeal and no sunset.

Section 162(m):

  • The CFO is once again subject to 162(m).
  • Anyone serving as CEO or CFO during the year is also subject to 162(m) (instead of just the individuals serving in those roles at the end of the year).
  • Once a covered employee for a company, always a covered employee for that company.
  • Stock options and performance awards will no longer be exempt from the deduction limitation.
  • Includes an exemption for compensation paid pursuant to a written, binding contract (such as a stock option or award agreement) in effect as of November 2, 2017, if not modified after that date.

Qualified Equity Grants: The final bill includes a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs: No change to the current tax treatment of stock options, SARs, or RSUs. The provision that would have taxed these arrangements at vest was removed from both versions of the bill before it was passed by House and Senate.

Determination of Cost Basis: No change from current law.  The Senate version of the bill would have required identification of securities sold to be on a FIFO basis but this is not included in the final bill.

– Barbara

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December 12, 2017

The SSA Got It Wrong, Not Me

I’m terrible at math. Really, really bad at it. Like the Justin Timberlake character in the movie Friends with Benefits bad.  So, for most of my career here at the NASPP, posting the alert about the yearly change to the maximum wages subject to Social Security has been a challenge, because it requires me to multiply the maximum wages by 6.2% to figure out the maximum withholding. Easy enough for most people, but in a lot of years I get it wrong.

So I’ve implemented some controls. Always copy the maximum wage base from the SSA press release; never type it. Instead of using a calculator (not as reliable as you might think, due to human error typing in the numbers or transcribing them), always do the math in Excel and always copy the result from Excel to the alert. And have someone else check my work, even though that person usually thinks I’m nuts for needing help with this. And then I check it a bunch more times myself (because it turns out that a lot of people are bad at math).

But this year, dammit, I got it right. I wrote a blog about it and posted the alert and no one emailed to tell me I had it wrong.

And then…

The SSA announced that they were changing the maximum. Yep, on November 27, the SSA issued a press release announcing that the maximum wage base for 2018 that they had originally reported ($128,700) is wrong and that the correct wage base for 2018 is $128,400. So the maximum Social Security withholding for 2018 is $7,960.80 (pretty sure, but feel free to check my math).

The SSA says the reason for the change is updated wage data:

This lower taxable maximum amount is due to corrected W2s provided to Social Security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 resulted in changes for three items based on the national average wage: the 2018 taxable maximum, primary insurance amount bend points–figures used in the computation of Social Security benefits–and family maximum bend points. No other items based on national average wages were affected.

But, I don’t know. Sure, it’s a believable story, but I think maybe the SSA is just as bad at math as I am. Just kidding. I really have no reason to doubt their explanation, although I am a little surprised that just half a million corrections can move the wage base by $300. With over 123 million employees in the United States in 2016 (and that doesn’t even count part-timers), that must have been quite an error.

– Barbara

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December 5, 2017

Tax Reform: Scorecard Update

The Senate passed its version of the Tax Cuts and Jobs Act late Friday night (well, technically, it was very early Saturday morning in DC).  Here’s a comparison of where the final Senate and House bills stand with respect to the provisions that directly or indirectly impact stock compensation:

Individual Tax Rates

  • The House version of the bill has four individual tax rates: 12%, 25%, 35%, and 39.6%
  • The Senate version of the bill has seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The rates sunset after 2025, at which time they revert back to the current rates.
  • In both bills, the highest rate kicks in at $500,000 of income for single taxpayers ($1 million for joint filers)

Supplemental Withholding Rate

  • For employees who have received supplemental payments of $1 million or less during the year: 35% under the House bill; 22% under the Senate bill.
  • For employees who have received supplemental payments of more than $1 million during the year: 39.6% under the House bill, 38.5% under the Senate bill.

AMT (for Individuals)

  • Repealed under the House bill.
  • The Senate bill doesn’t repeal the AMT, but it does increase the exemption amounts and phaseout thresholds.

Corporate Tax Rate

  • Both bills reduce the corporate tax rate to 20%. The reduction doesn’t take effect until 2019 in the Senate bill.

Estate Tax

  • Both bills increase the estate tax threshold to about $11 million.
  • The House bill repeals the estate tax altogether after 2024.
  • The Senate bill sunsets the increased threshold after 2025.

Section 162(m)

  • Both bills expand the employees subject to 162(m) to once again include the CFO and to include anyone serving as CEO during the year (rather than only the CEO at the end of the year).
  • Under both bills, once individuals are covered employees, they remain covered employees for as long as they receive compensation from the company.
  • Both bills also eliminate the exception for stock options and performance-based pay.
  • The Senate bill includes a transitional provision that would exempt compensation paid via a written binding contract that was in effect as of November 2, 2017. This is broader than the transitional provision that was originally proposed, which would have only exempted arrangements vested as of December 31, 2016. There is no transitional provision in the House bill, so all prior awards would be subject to the new rules under that bill.

Qualified Equity Grants

  • Both bills include a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs Taxed at Vest

  • This provision has been removed from both bills, so there is no change to the tax treatment of stock options, SARs, or RSUs.

Determination of Cost Basis

  • The Senate bill still includes the provision I blogged about last week that requires taxpayers to sell securities of the same type on a FIFO basis (when held in the same account). This provision is not in the House bill.

What’s Next?

As you can see, there are lots of areas where these two bills don’t agree (and this is just the tip of the iceberg—there is even more disagreement in areas of the bills the don’t relate to stock compensation). All of these differences have to be reconciled before the bill can become law, so the bill now goes to a conference committee comprised of members of both the Senate and House that will resolve the differences between the two bills.

– Barbara

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November 21, 2017

Year-End Tax News: COLAs

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.


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.


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.

– Barbara

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November 16, 2017

What’s the Score?

Late Tuesday, the Senate Finance Committee released modifications to the Senate’s version of the Tax Cuts and Jobs Act.

Nonqualified Deferred Compensation, Stock Options, and Restricted Stock Units

The provision that would have required all forms of NQDC, NQSOs, and RSUs to be taxed at vest has been struck from the bill. That means that 409A still stands (I bet you never thought you’d be glad to read those words) and the tax treatment of stock compensation is unchanged. Hopefully this is the last time I’ll have to blog about stock options being taxed at vest, at least until the next time Congress decides to take on deferred compensation.

Section 162(m)

The provision that would expand the employees covered under Section 162(m) and repeal the exemption for stock options and performance-based pay is still included in the bill (see “Tax Reform Targets 162(m)“). This provision was amended however, to grandfather awards granted before November 2, 2017 that were vested as of December 31, 2016, so long as they aren’t materially modified after November 2, 2017.

Is that language confusing to you? It is to me. I’m not sure how an award could be vested before it is granted. Maybe there are other types of compensation where this is possible but, in the context of stock compensation, what I think it boils down to is that options and awards granted and vested prior to December 31, 2016 will be exempt from the new requirements but anything granted or vesting after that date will be subject to it. So it’s too late to accelerate vesting on stock options to exempt them from the new requirements.

Qualified Equity Grants

The “Qualified Equity Grants” provision that was added to the House bill (see “Another Tax Reform Update“) has also been added to the Senate bill. This provision creates a new type of qualified equity award that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.

Now that it’s in both bills, I spent a little more quality time with the summary of it and, frankly, I think there are a lot of problems with it. The five-year deferral is measured from the vesting date, even for stock options; the deferral election has to be made within 30 days of the vest date, even for stock options; taxable income is based on the value of the stock at vesting, even if the stock is worth so little at the end of the deferral period that it is no longer sufficient to cover the taxes due; and taxes have to be withheld at the highest marginal income tax rate. I just don’t see this being helpful to private companies.

The Scorecard

For those of you keeping score, here’s the wrap-up of where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 0 (out of both bills)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 1 (in both bills)

– Barbara

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November 14, 2017

Tax Reform: More Than Just Stock Options

It feels like I did nothing last week but talk about whether stock options would be taxed at vest. The tax reforms bills proposed by the House and Senate are much broader than you might think based on last week’s blog entries. Today I look at some of the other provisions in the bills that could have at least an indirect impact on stock compensation.

Supplemental Withholding Rate

The bills don’t expressly change the supplemental withholding rate but they could have an impact on it. Currently, the optional flat rate for supplemental payments of less than $1 million per year is tied to the third lowest tax marginal income tax rate. Under the House’s proposal, which has only four income tax brackets, this rate will be 35% (for single filers, this is the rate that applies to the $200,000-$500,000 income tax bracket). Under the Senate’s proposal, which has seven income tax brackets, this will be 22.5% (for single filers, the $38,700-$60,000 income tax bracket). The 25% rate under current law is the rate that applies to the $77,400-$156,150 bracket (for single filers).

The difference in tax rates and brackets is clearly one of the most significant areas of the two bills that will have to be reconciled. As you can see, the bills will produce very different results when it comes to withholding on supplemental payments: the rate under the House bill is likely to result in overwithholding for many employees, while the rate under Senate bill will result in underwithholding on supplemental payments paid to executives and other highly paid employees (intensifying the pressure for companies to allow excess withholding on equity awards). It’s also possible that both bills could be amended to address what rate should apply to supplemental payments.

There isn’t currently anything in either bill that would eliminate the requirement to withhold at the maximum individual rate for individuals who have received supplemental payments in excess of $1 million during a year. Under the House bill, the maximum individual rate would remain 39.6%, but under the Senate bill, it would drop to 38.5%.


Both bills would repeal the AMT, which makes ISOs a little less complex. I’m not sure this is enough, by itself, to trigger a resurgence of ISOs. But in combination with a significantly reduced corporate rate and the fact that ASU 2016-09 has already equalized ISOs and NQSOs for diluted EPS purpose, maybe this would be enough to at least trigger some renewed interest in ISOs.

Long-Term Capital Gains

Both proposals generally keep the long-term capital gains rates the same. But to the extent that ordinary income rates (and, by extension, short-term capital gains, since short-term capital gains are generally taxed at ordinary income tax rates) are lower, employees may be less inclined to hold stock acquired under equity compensation vehicles.

Estate Taxes

Both bills increase the threshold at which the estate tax applies to $10 million (currently the threshold is about $5.5 million).  The House bill would also repeal the estate tax after six years. If the estate tax is repealed, there would be no reason to transfer stock options prior to death for estate planning purposes; with the threshold increased, fewer employees would need to worry about this.

– Barbara


November 10, 2017

Groundhog Day

A summary of the Senate version of the Tax Cuts and Jobs Act was released late yesterday and guess what? Yep, it includes the same provision changing the taxation of NQDC and stock compensation that the House bill had. It’s beginning to feel a little like the movie Groundhog Day. But hey, at least we aren’t talking about the CEO pay ratio anymore.

(Because it’s Friday and my fourth, no fifth, blog this week, I have a picture of a groundhog for you.)

Senate Version

The summary from the Senate version bill looks a lot like the same text that was in the JCT report of the House bill, so I did a document compare just for fun, because that is the sort of thing that is fun for me.

Turns out there are a few minor differences. Most significantly, the Senate version still exempts ISOs and ESPPs, but it sounds like the exemption might only apply if the shares acquired under these awards are sold in a qualifying disposition. This probably doesn’t impact ESPPs, since I think the purchase date would be considered the vest date in most cases, but it could impact how income on a disqualifying disposition of an ISO is determined.

The Senate version also includes the provision that modifies Section 162(m) to update the definition of covered employee and eliminate the exception for performance based compensation.

What’s the Score?

So, if you are keeping score, here’s where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 1 (out of the House bill, in the Senate bill)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 0 (in the House bill, not in the Senate bill)

What’s Next?

Well, for sure, what’s next is the weekend, during which I don’t expect anything to happen on either of these bills. I’m guessing we all could use a little break. Go enjoy yourselves.

The Ways and Means Committee has approved the House bill; next stop for it is floor of the House for debate and a vote. This is expected to happen next week. The Senate bill starts committee markup next week and still has to be voted on by the Senate Finance committee before it can go to the full Senate for a vote.

Once passed by both the House and Senate, both bills will have to be reconciled so that they agree. There are major differences in the bills right now in areas that don’t directly impact stock compensation; the topics I have been writing about are just tiny parts of very broad legislation. But if the differences I’ve noted above aren’t reconciled during committee markup in the Senate or in the floor debates, they will have to be addressed during the reconciliation process.

I will keep you posted.

– Barbara

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