By Marlene Zobayan, Rutlen Associates
Last October I blogged about year-end preparations for mobility compliance ("Year-End Preparation for Mobility Compliance"). Many of the start-of-the-year tasks are extrapolations of these tasks.
In this Blog I want to focus on the extrapolation of one of these tasks: Check whether each payroll has recorded all equity income. This is an important task not only for filing correct annual wage statements (W-2s and their equivalents in other countries) but it is also important for making sure the equity income is correctly captured on any annual reports, that is, those special reports required for equity compensation.
Examples of such reports include Form 9(3) in Japan, RSS1 in Ireland (stock options), online reporting for the U.K. and the ESS in Australia. As a reminder, the due dates for the reporting will vary by country.
In addition to including the trailing tax liability for mobile employees in an annual wage statement, most countries would require the inclusion of mobile employee stock awards in any annual reporting. Be sure to consult with your advisors as to whether the full income should be included in any reports or just the country-sourced income. The answer could differ based on whether the individual is a full-year resident or a part-year resident in that country.
As far as the US is concerned there are two pertinent annual requirements that can catch companies with mobile employees off-guard.
As you are aware these informational filings report the exercise of ISOs and the purchase of shares under a Section 423 ESPP.
These filings are ‘all or nothing.’ The number of shares reported for mobile employees are not prorated for these filings. Forms 3921 and 3922 are not required for employees who meet the following conditions:
This exception is very narrow. If the company is required to issue Form 3921 or 3922 for the individual, the full number of shares must be included.
The income from mobile employees’ ISO and ESPP dispositions should be pro-rated for W-2 reporting purposes. Obviously for an ISO this would only occur if there were a disqualifying disposition.
One tricky aspect is the W-2 reporting on the sale of ESPP shares, which occurs regardless of whether there is a disqualifying disposition or not. In the case of a qualifying disposition, the sale could take place many years after the purchase occurred.
For mobile employees, the company should allocate the income based on the employee’s work location between the start of the offering period and the purchase date. Even if the company does not typically apply mobility to ESPP, (many companies choose to focus their resources on larger exposure awards such as stock options and RSUs) care should be taken not to inadvertently subject an employee to state tax where it was not needed.
For example, a US expatriate was assigned to Ireland for several years, breaking California residency. The individual participated in the ESPP during his time in Ireland and made several purchases under the plan. He sold some ESPP shares while still in Ireland. He then relocated back to California midyear. The company did a year-end survey of ESPP dispositions and reported them to payroll based on location at year-end. This individual could have ended up paying California taxes on the ESPP income even though the entire transaction took place while he was California nonresident. Luckily this was caught and corrected.
If you updated the state tax withholding rates for 2022, you may have noticed a surprising but welcome trend. Several states and localities have reduced their supplemental withholding rates for 2022.
Marlene Zobayan is a partner at Rutlen Associates LLC, a boutique consulting firm helping companies with their global equity plans and/or mobile employees.
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