It’s tax reporting time, which means you are checking and double checking the information that will be remitted to the IRS and your stock plan participants.
I offer 5 quick tips that will help avoid costly and time draining tax reporting errors.
Yes, this sounds like a no brainer. Of course we want to have the correct address for our employees. While it is always good to verify correct demographic information, such as a mailing address, it’s especially important for 2020 tax reporting. Why? Because 2020, the year of the pandemic, saw many people go mobile. From permanent moves to temporary relocations to changing scenery at a vacation house, participants may not be where you think they are at. Make sure you do your due diligence in attempting to identify changes in mailing addresses.
“I get it!” you say. I know you do. But this one can be overlooked. For one thing, nonemployees may not have access to the same systems or communications that employees do. They may have been overlooked in prior outreach attempts. Be sure to include non-employees in your address verification process.
With few exceptions, non-employee income for stock compensation is now reported on the new IRS Form 1099-NEC. Whereas Form 1099-MISC was used to report similar income for non-employees in prior years, this is no longer the case for most transactions. In addition, the 1099-NEC has an earlier IRS filing due date (typically January 31; for 2021 filings the date is February 1st due to January 31 falling on a weekend). Make sure whomever is preparing non-employee 1099s understands these changes.
Exceptions to using Form 1099-NEC for non-employee stock compensation reporting:
Income reported for an employee’s ex-spouse pursuant to a divorce transfer is still recorded on Form 1099-MISC.
Income resulting from a 409A violation is reportable on both Form 1099-MISC (Box 14) and Form 1099-NEC (Box 1).
When stock compensation is transferred pursuant to a divorce, some of the tax reporting can feel quirky. Remember the following in reporting income and withholdings for an employee’s ex-spouse:
Gain and federal income tax withholdings are reported on 1099-MISC issued to the ex-spouse.
Income reported in box 3 and withholding is reported in box 4 (and boxes 16 and 18, if state income taxes are applicable)
Gain and FICA withholding are reported on employee’s Form W-2.
Gain is reported only in boxes 3 (Social Security wages, if applicable) and 5 (Medicare wages)
Nobody wants to think about the scenario of an employee’s death. Yet, it does happen and it is important to properly report income and withholdings.
Options and awards transferred pursuant to an employee’s death have the following requirements:
No income tax withholding
FICA withholding (and FUTA payments, if applicable)
Portion of options vested prior to death: FICA/FUTA required only if exercise occurs in calendar year of employee’s death. IRC (Section 3121(a)(14))
Reported on employee’s final Form W-2
Portion of Options/Awards for which vesting is accelerated upon death:
May not be subject to FICA
IRC Section 3121(a)(13) provides that wages for FICA purposes don't include payments made to the employee's dependents as a result of an employee's termination due to death, provided that the compensation would not have been paid in absence of the employee's death.
Some tax advisors disagree with this position. Follow the advice of your advisors.
These tax reporting tips will help you avoid headaches during tax season. I discuss them in more detail in an episode of our Equity Expert podcast, “5 Tax Reporting Tips.” Here’s to wishing you smooth tax reporting!