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The details surrounding exactly when tax deposits are due on stock compensation come up regularly in the NASPP Discussion Forum. In honor of our NASPP Ask the Expert's webcast today on Restricted Stock and Unit Awards, I'd like to summarize the issue.
IRS $100,000 Deposit Rule
Most public companies that offer stock compensation are semi-weekly filers, meaning they must make tax deposits with the IRS two times each week. These deposits are due within three business days after the deposit period. For example, if your period includes Tuesday, Wednesday, and Thursday, then the tax deposit for those three days would be due the following Wednesday. This is the company's normal deposit schedule.
However, once the total tax liability reaches $100,000 for any corporate entity the deposit is due the next business day. (See IRS Publication 15.) For example, if the entity's total tax liability reaches $100,000 on a Tuesday, the IRS would expect that deposit to be made on Wednesday of the same week. For those of you keeping score, the total tax liability to the IRS includes all taxes that get reported on the company's quarterly tax return--Form 941. That is the total of income tax and both employee and employer Social Security and Medicare after adjustments, although that is more of a detail for the payroll team than for stock plan managers. Also, the liability only accumulates beginning after a deposit period. For example, if your deposit period includes Tuesday, Wednesday, and Thursday, then you do not need to combine Thursday's liability with Friday's liability.
The IRS issued a Field Directive in 2003 instructing IRS auditors not to challenge tax deposits from "broker-dealer trades" (i.e., broker-assisted cashless exercises) made the business day after the settlement of the exercise, provided the settlement is no longer than three days. This doesn't change companies' tax deposit timeframe; it simply instructs auditors not to challenge these deposits. In spite of this technicality, most companies rely on this Field Directive for remitting taxes to the IRS on all same-day sale NQSO exercises.
RSUs and RSAs are where stock compensation and tax deposit liability get really tricky. There isn't any specific rule, regulation, or even Field Directive or instruction that specifically addresses how to handle the timing of the tax deposit due on restricted stock. Rather, it's the fact that it isn't addressed as an exception that is most important. Until or unless it is addressed, it's safest for companies to assume that the income for deposit timing purposes is paid out on the vest date. If the vest date falls on a day when the total tax deposit liability reaches $100,000 or more, the taxes from that vesting event are due to the IRS no later than the following business day.
Yes, there are penalties for late deposits. Yes, the IRS does audit this. It is true that there are companies who still do not make timely deposits intentionally because they either can't figure out how or have determined that the cost of compliance is higher than the potential fines. However, the penalties range from 2% to 15% of the late or unpaid tax amount, which could be very expensive if late deposits are a regular occurrence. Remember that the late deposit is the entire amount due, not just the amount in excess of $100,000. Of course, there are a litany of approaches to try and get the penalties reduces or recalculated. However, even if your company is successful at reducing the amount due it still has to pay someone to negotiate with the IRS and that does not come cheaply, either.
The reality is that your payroll department needs processing time and your payroll service provider requires processing time. There is pretty much no way for you to send tax amounts to your payroll team after the close of market on the day that restricted stock vesting events have created a next-day deposit liability for your company and actually have that deposit made to the IRS before the close of business the next day.
So, aside from defining the FMV for restricted stock vests as some component of trading value three days prior to the vest, how do you make a timely tax deposit and avoid the penalties? Although it isn't the only possible approach, the most common method for compliance according to the NASPP's most recent Quick Survey on Restricted Stock is to estimate the tax liability in advance of the vesting event and then make corrections after the actual tax liability is known.
Year-End Tax Updates
The end of the year always brings a few tax updates. Here are the ones that have been announced so far:
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