Tax Center: NQSO Withholding

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Articles (Jump to FAQs)

Stock Option Fundamentals (Part 3): Income Taxes And Withholding

Marilyn Renninger
Here's some advice for financial fitness: take stock of taxes before you exercise! When and how you exercise your stock options can have a major impact on how much tax and which taxes you'll pay.

IRS Guide To Auditing Techniques For Stock-Based Compensation

Internal Revenue Service
The IRS tips its hand on what its agents look for in audits related to all types of stock pay to ensure compliance, whether by corporations or executives.

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FAQs (Jump to articles)

UPDATED! Does the American Jobs Creation Act, particularly Section 409A on deferred compensation, affect my stock grants?

A number of tax law provisions and interpretations that may affect your stock grants occur in the wide-ranging American Jobs Creation Act (AJCA); the final regulations on deferred compensation under Section 409A, which adopt the...

Will my employer report to the IRS any income from an NQSO exercise?

Your employer will include the amount of the spread at exercise of an NQSO on...

How does my employer calculate the amount of withholding due at the exercise of a nonqualified stock option?

When you sell the stock at exercise, companies usually calculate the taxable spread with your...

How is fair market value determined for W-2 reporting of NQSO taxable income at exercise and for tax withholding?

To calculate the taxable income at exercise, your company subtracts your exercise price from the fair market value (FMV) of the stock at exercise. Approaches to this FMV calculation depend on...

Is the spread at exercise of a nonqualified stock option subject to federal income-tax withholding?

Yes. The spread at exercise is treated as wages and requires...

Is the spread at exercise of a nonqualified stock option subject to state and local taxes?

Many states, along with some counties and cities, impose...

Does the tax-withholding rate for supplemental income differ for amounts less than $1 million and for amounts over $1 million?

Depending on the aggregate amount of supplemental income for the year, a two-tier rate applies. The withholding rate for supplemental wages that exceed $1 million in a calendar year is...

Will the amount of tax withheld at NQSO exercise cover the amount of tax that I am required to pay when I file my return?

Not necessarily. Employers usually withhold federal income taxes at the rate used for supplemental wages...

May I have my employer withhold more taxes upon my exercise of an NQSO than the minimum required amount?

Your actual tax bracket may be higher or lower than the mandatory federal withholding rate. Whether your company can withhold more depends on...

How do I pay any required tax-withholding when I exercise an NQSO?

If you do a cash exercise, your employer will require you to make arrangements to pay additional cash to the company to cover the withholding obligation. If...

In a cashless NQSO exercise, how are my taxes withheld and paid to the IRS?

The IRS has set deposit rules companies must follow. With a cashless exercise, the broker essentially sells the shares that underlie the options at the time of exercise. The broker sends the company cash from the sale of your shares that is equal to the amount required for tax...

I received a notice (CP-2000) from the IRS stating that, according to last year's tax return, I owe money for the cashless exercise of my stock options. I thought I paid all the taxes through withholding at exercise. How do I reply?

You made this mistake because the stock sale at exercise does not generate any gains. The full spread between your exercise and sale prices was added to your W-2, and taxes were withheld at exercise, so you thought you did not need to report the sale on Schedule D of your Form 1040. However...

After I exercise NQSOs, will I need to make estimated tax payments?

At a minimum, when you exercise your stock options, your company will withhold taxes at the required federal withholding rate for supplemental income. However, depending on your income, this minimum withholding may not be enough. If so, you will need to...

Are there any strategies for paying estimated taxes on income from stock options and restricted stock?

Estimated-tax periods end on the last days of March, May, August, and December, with payments due by the 15th (or the next business day) of the following month. If you are paying estimated taxes, one strategy is that just after the start of an estimated-tax period you can...

My new company withheld Social Security tax from my wages even though I "maxed out" on these taxes this year from my stock option exercise and restricted stock vesting at my prior employer. Can I get a refund or a credit on my tax return?

When you have more than one job in a year, each company must withhold Social Security tax without considering what the other company withholds. The result could be...

Are the tax rules, withholding, and tax return reporting for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee?

In some ways they are similar, though different if you were an employee at the time of grant. The tax treatment of NQSOs is...

I'm no longer an employee, so why is there withholding on my NQSO or SARs exercise?

Former employees' transactions, regardless of the reason for termination, follow the same withholding and reporting requirements that apply to...

After stock options are transferred to my former spouse in divorce, who pays the taxes at exercise? How does my company withhold and report the taxes?

The IRS has issued revenue rulings that clarify the withholding and tax reporting. The nonemployee-spouse would be responsible for those taxes at exercise. All tax payments (income and employment taxes) are withheld from...

I may leave my company to become a consultant, retire, or take another job. Will taxes still be withheld on my NQSOs, SARs, and/or restricted stock as they were when I was an employee? What if I live in another state when I exercise them?

Most companies base withholding on your employment status at the time of grant. If you work elsewhere or are retired at exercise or vesting, then...

Can I deduct the state tax that was withheld from my NQSO exercise?

Generally, state and local income taxes are an itemized deduction on your...

Do tax withholding and reporting apply to NQSOs exercised by the estate or beneficiary?

When the estate or beneficiary exercises the option, it triggers ordinary income. Whether it is W-2 income and taxes are withheld, or whether it is 1099 income, depends on...

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