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Category Archives: Reporting and Withholding

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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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 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


May 23, 2017

Excess Tax Withholding: Survey Says…

One of the hottest questions I am hearing these days is whether to allow US employees to request additional federal tax withholding on their restricted stock, RSU, and performance awards. So, last week, we conducted a quick survey to find out what NASPP members are doing. Here are the results, in a nifty infographic:

Can’t see the infographic? View it on a separate web page.

Excess Tax Withholding
Create pie charts

– Barbara

P.S. NASPP members are awesome! We launched this survey on Thursday and by Saturday I had enough responses to close the survey and finalize the results. Thanks to all of you who participated so quickly! You rock! Check out the full survey results.

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April 6, 2017

5 Trends in Tax Withholding Practices

For today’s blog, I feature five trends in tax withholding practices for restricted stock and units, from the 2016 Domestic Stock Plan Design Survey (co-sponsored by the NASPP and Deloitte Consulting):

  1. Share Withholding Dominates; Sell-to-Cover Is a Distant Second. The majority (79% of respondents for executive transactions, 77% for non-executive transactions) report that share withholding is used to fund the tax payments the majority (greater than 75%) of award transactions. Most of the remaining respondents (17% of respondents for executive transactions, 18% for non-executive transactions) report that sell-to-cover is used to pay the taxes due on the majority of award transactions.
  2. Rounding Up Is the Way to Go. Where shares are withheld to cover taxes, 75% of respondents report that the shares withheld are rounded up to the nearest whole share. Most respondents (62% overall) include the excess with employees’ tax payments; only 13% refund the excess to employees.
  3. FMV Is Usually the Close or Average. The overwhelming majority (87%) of respondents use the close or average stock price on the vesting date to determine taxable income. Only 12% look to the prior day’s value to determine taxable income, despite the fact that this approach provides an additional 24 hours to determine, collect, and deposit the tax withholding due as a result of the vesting event (see “Need More Time? Consider Using Prior Day Close“).
  4. Form 1099-B Is Rare for Share Withholding. Although share withholding can be considered the equivalent of a sale of stock to the company, only 21% of respondents issue a Form 1099-B to employees for the shares withheld.
  5. Companies Are Split on Collecting FICA from Retirement Eligible Employees. Where awards provide for accelerated or continued vesting upon retirement, practices with respect to the collection of FICA taxes are largely split between share withholding and collecting the tax from employees’ other compensation (41% of respondents in each case).

– Barbara

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November 15, 2016

Tax-Related Changes for 2017

Lately, there’s been a lot of speculation about what a Trump presidency and a Republican Congress means for tax rates in 2017.  I got nothin’ on that. But what I do have for you today are some tax changes for 2017 that are already finalized.

New Filing Deadlines

Where nonemployee compensation is reported in box 7 of Form 1099-MISC, the deadline to file the form with the IRS has been accelerated to January 31 (previously the deadline was February 28, for paper filers, and March 31, for electronic filers). This will apply to Forms 1099-MISC issued to report compensation paid to outside directors, consultants, independent contractors, and other nonemployees.

Form 1099-MISC is also used to report income recognized on (i) stock plan transactions after an employee’s death, and (ii) transactions by an employee’s ex-spouse for stock awards transferred pursuant to divorce.  In each of these cases, however, the income is reported in box 3, rather than box 7. Consequently, a Form 1099-MISC for these transactions doesn’t need to be filed until the regular February 28/March 31 deadline. (Assuming, of course, no other income is reported in box 7 of the form. For instance, if an employee’s ex-spouse provided services to the company as a consultant in 2016 in addition to exercising a stock option transferred to him in their divorce settlement, and the income for the consulting fees is reported in box 7 along with the option gain in box 3, the Form 1099-MISC would have to be filed with the IRS by January 31. And if the employee died in 2016 and hadn’t updated her beneficiary designation so her RSUs were paid out to the ex-spouse in addition to the consulting fees and the option gain…well, you get the idea.)

The deadline to file Form W-2 with the Social Security Administration has also been accelerated to January 31.  These changes were part of the Protecting Americans from Tax Hikes Act and are intended to help prevent tax fraud. In the past, individual taxpayers received their copy of these forms before the IRS and could have even filed their tax return before the IRS received their Form W-2 or 1099-MISC. This could result in errors (inadvertent or intentional) that the IRS wasn’t able to catch until possibly as late as April, when the company filed these forms with the SSA/IRS. By then, a refund might have been issued to the taxpayer and the IRS was in the difficult position of trying to recover it. With the accelerated filing deadlines, the IRS will theoretically be able to catch these errors before refunds are issued.

The deadline for filing Forms 3921 and 3922 with the IRS is still February 28/March 31. Also, the deadline to distribute the employee copy of all of these forms is still January 31.


The cost-of-living adjustments for 2017 have also been announced. Here are the highlights that related to stock compensation:

  • The wage base for Social Security is increasing to $127,200 (up from $118,500 in 2016). The Social Security tax rate isn’t changing (that requires Congressional action), so if I’ve done the math right (something you should never take for granted—math just isn’t my gig), the maximum withholding for Social Security will be $7,886.40 in 2017.
  • No changes to the Medicare rates or the threshold at which the higher rate kicks in, at least for now. Changing either of these things also requires Congressional action; while it’s certainly possible that a repeal or amendment of Obamacare might result in changes to Medicare tax rates or thresholds in 2017, it’s unlikely that either will change before the new administration begins.
  • The level of annual compensation at which employees can be considered highly compensated for purposes of excluding them from participating in a Section 423 ESPP will remain $120,000.

More Information

For more information, see the NASPP Alert “Tax Changes in 2017.”

– Barbara

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July 19, 2016

The IRS and Treasury Speak

We are pleased to bring back our popular “Meet the Speaker” series, featuring interviews with speakers at the 24th Annual NASPP Conference.  These interviews are a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.

For our first “Meet the Speaker” interview, we feature Deborah Walker of Cherry Bekaert, who will lead the session “The IRS and Treasury Speak.” Here is what Deborah had to say:

NASPP: Why is your topic particularly timely right now?

Deborah: Our presentation features IRS and Treasury speakers involved in regulatory and legislative initiatives involving equity compensation. This is a chance to hear the government’s enforcement focus and new guidance that could affect your equity plans and programs. In prior years, the session has been interactive, giving you a chance to question the government officials about an issue that concerns you and discuss their response, often giving the government ideas for ways to approach various issues that are less obtrusive than what the government may think about. We look forward to another interactive session this year in Houston.

NASPP: What is one best practice companies should implement?

Deborah: The IRS is implementing new computer audit procedures, enabling them to determine that withholding taxes are unpaid in a matter of days rather than in a matter of months. To avoid unnecessary intrusions in the form of “soft letters” from the IRS, you should review your payroll tax withholding and deposits for equity compensation, focusing particularly on the timeliness of deposits for the vesting of restricted stock and the exercise of non-qualified stock options. This should be done on a regular basis. Correction of failure to deposit amounts should be done as soon as possible.

NASPP: What is something companies should know about penalty assessments from the IRS?

Deborah:  As the IRS computer systems are becoming more modern, there is an increase in penalty assessments. If you are assessed an IRS penalty, the IRS has a program allowing for the waiver of penalties when a penalty notice is a first time assessment. The program is only available to those who have had no penalties in the prior three years.  There is no limit on the amount that can be waived. If this program is not available to someone when a penalty has been assessed, the taxpayer or their representative should always ask for waiver of the penalty for reasonable cause.

NASPP: What is something people don’t know about you?

Deborah: I had a speaking part as a terrified nun in the Three Stooges movie produced in 2012 by 20th Century Fox and directed by the Farrelly brothers.

Don’t miss Deborah’s session “The IRS and Treasury Speak” session at the NASPP Conference!

About the NASPP Conference

The 24th Annual NASPP Conference will be held from October 24-27 in Houston. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!

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June 9, 2016

Update to ASC 718: Tax Withholding

I’ve been getting a lot of questions about what tax withholding rate can be used for federal income tax purposes, now that the FASB’s update to ASC 718 is final and companies are free to adopt it.  So I thought I’d take a blog entry to clarify what’s changed and what hasn’t.

Who’s the Decider on Tax Withholding Procedures

One thing that a lot of folks seem to have forgotten is that the FASB doesn’t determine tax withholding procedures; they just determine how you account for situations in which tax is withheld.  The ultimate authority on how much tax you should (and can) withhold in the United States is the IRS, not the FASB.

Tax Withholding for Supplemental Payments

I’ve blogged about the rules for withholding on supplemental payments, which include stock plan transactions, quite a bit (search on the term “Excess Withholding” in the NASPP Blog). There are two choices when it comes to withholding taxes on stock plan transactions for employees who have received less than $1 million in supplemental payments for the year:

  1. Withhold at the flat rate (currently 25%). No other rate is permissible.
  2. Withhold at the employee’s W-4 rate. Here again, no other rate is permissible.

If employees want you to withhold additional FIT, they have to submit a new W-4 requesting the withholding (as a flat dollar amount, not a percentage) and you have to agree to withhold at the W-4 rate. This is stated in IRS Publication 15 and even more emphatically in IRS Information Letter 2012-0063. Whether you are using method 1 or 2, you can’t arbitrarily select a withholding rate.

Where Does the FASB Come Into This?

The FASB has no authority over these requirements and they didn’t amend ASC 718 to make is easier for you to ignore the IRS requirements. They amended ASC 718 to make it easier for companies that grant awards to non-US employees to allow those employees to use share withholding. Other countries don’t have a flat rate, making it challenging for the US stock plan administration group to figure out the correct withholding rate for non-US employees. This would allow companies to withhold at the maximum rate in other countries and refund the excess to employees through local payroll (who is more easily able to figure out the correct withholding rate).

The only change for US tax withholding procedures is that if you want to use the W-4 rate to withhold excess FIT, withholding shares for the excess payment will no longer trigger liability treatment once you adopt the update to ASC 718. But if you want to withhold excess FIT, you still have to follow the IRS procedures to do so. Previously, even if you had followed the IRS W-4 procedures, withholding shares for an excess tax payment would have triggered liability treatment.

Why Not Use the W-4 Rate?

No one wants to use the W-4 rate because it is impossible to figure out.  You have to aggregate the income from the stock plan transaction with the employee’s other income for the payroll period, which the stock plan administration group doesn’t have any visibility to.  The rate varies depending on the number of exemptions the employee claims on Form W-4.  And the rate is complicated to figure out. I count at least seven official methods of figuring out this rate and companies can make up their own method (but if they make up a method, they have to apply it consistently, the stock plan administration group can’t make up a method that is different than the method the payroll group uses).

The upshot is that you literally can’t figure it out. You would have to run the income through your payroll system to figure out what the tax withholding should be.  And that’s a problem because your stock plan administration system is designed to figure out the withholding and tell payroll what it is, not the other way around.

What’s the Penalty?

Members often ask me what the penalty is for withholding extra FIT without following the IRS procedures.  Generally there isn’t a penalty to the company for overwithholding, provided there’s no intent to defraud the IRS (if you don’t understand how overwithholding could involve tax fraud, see “Excess Withholding, Part 2“) and the withholding is at the request of the employee. Doing this on a one-off basis, at the occasional request of an employee, probably won’t result in substantial penalties to the company, especially if the employee has appropriately completed Form W-4 for his/her tax situation. (Note, however, that I’m not a tax advisor. You should consult your own advisors to assess the risk of penalty to your company.)

But I’ve encountered a number of companies that want to create a system to automate electing a higher withholding rate without following the W-4 procedures (in some cases, for all of their award holders).  I think that it could be problematic to create an automated system that circumvents the W-4 process, especially in light of Information Letter 2012-0063. That system is likely to be noticed if the company is audited, and I think it could have negative ramifications.

– Barbara


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