Figuring out what tax withholding method(s) may work best for your equity plan is not a one-size-fits all approach. Here are the more common choices:
Withhold from salary
Withhold shares (net issuance)
Cash (remitted by employee)
Several variables can influence the decision on which methods to use. Among them are the type of award, the company’s cash flow considerations, trading windows, and stock volatility.
Different award types can have different withholding methods. An ESPP, for example, might be a withhold from salary program, while the company may collect taxes on RSUs via withholding of shares at vest.
A company can change withholding methods (in compliance with plan and agreement terms) to adapt to changing variables – like company growth or addition of a new equity type.
A global company with payroll departments scattered around the world may mean that the parent entity, the one ultimately accountable for withholding on equity awards, may not have access to the local payroll’s tax withholding rates. This drives the question: what rate should be used?
Klementz suggests that in most cases, the most sensical answer is to use a maximum withholding rate. Changes in US accounting rules within the past few years (permitting withholding beyond the statutory minimum) makes this a viable approach to withholding. While this ensures enough taxes are collected to remit to the appropriate tax authority, there can be pitfalls.
One downside of withholding at the maximum tax rate is a scenario where the employee is due a significant refund due to over-withholding. In cases where shares were used to satisfy taxes, withholding the maximum means the employee receives fewer shares. In all cases of over-withholding, regardless of method, a refund would likely be due to the employee.
Some plans pre-date accounting rule changes and still require withholding at no more than the statutory minimum. In this case, the plan terms would need to be followed or amended.
Although collecting taxes based on a maximum rate ranks high on the easy-to-implement and manage spectrum, the potential impact to employee morale may cause a company to consider alternatives. Some other approaches to evaluate are:
This can result in very accurate withholding and is especially viable when the parent entity receives automated payroll data feeds from their various localities. Without automation, this could be especially tricky to maintain.
Establishing a handful of withholding rates that span the minimum-maximum spectrum of liability for a jurisdiction could result in more accurate withholding, fewer refunds, all while satisfying withholding requirements.
Klementz reports that in Germany the maximum withholding rate is 51%. As an example, a company may decide to have two withholding buckets for employees in Germany: one bucket set at 51.525%, the other set at 25%. Employees would be allocated to the bucket that most aligns with their anticipated income for the year, as determined by stock administration and payroll.
This bucket allocation is based on the employee’s expected income. Income should account for salary, bonus, equity, and anything else required to be factored in per local regulations.
I’ve only scratched the surface of the tax compliance tips and traps shared by Klementz, Lai and Nguyen. They also have insights on:
Tax withholding challenges for ESPP
Ensuring global tax compliance
Benefits and dangers of a tax-qualified plan
Withholding at more than the supplemental rate in the U.S.
Country-specific tax traps
Tax compliance should be a priority of focus for any company. Keeping on task with understanding requirements, potential pitfalls and best practices can be overwhelming when multiple jurisdictions are involved. It’s a must for companies to allocate sufficient time and resources to plan, implement and monitor their global tax compliance strategy – including learning about alternatives and deciding on the best course of action.
All of these insights will be explored in detail at the upcoming Virtual NASPP Conference (#NASPPVirtual) in the session “Top 7 Tax Tips and Traps” The presentation features Barbara Klementz of Baker McKenzie, Georgina Lai of Reddit, and Audrey Nguyen of Salesforce.com. To attend this session and more, visit our conference page.
With 60+ sessions across stock plan domains, exciting keynotes, and plenty of interactive opportunities, NASPP Virtual is the must-attend equity event of the year. No need for FOMO (fear of missing out) over a session - a huge perk this year is that all sessions will be available on-demand through the end of September. You can attend the entire conference (binge watch in your pajamas if you want) or pick and choose what works best for you. I can’t wait to see you (online) there!
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