Tax Center Global Tax Guide / Glossary / Discussion / Newsletters / About Us
Register Log In
myRecordsmyToolsmyClients

Tax Center › NQSO Withholding

Want to know more? Listen to our podcast on tax return tips and how to avoid reporting mistakes!

Check out our podcast and video on the tax forms and reporting rules for stock sales.

Articles

VIDEO! Employee Stock Options: NQSO Taxation

To make the most of nonqualified stock options (NQSOs), you must understand their taxation. Learn the tax basics of NQSOs in this video, which features clear and concise explanations by the editor-in-chief of myStockOptions.com. Running time: 2:58.

Stock Option Fundamentals (Part 3): Income Taxes And Withholding This is premium content

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

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.

FAQs

After I exercise NQSOs, will I need to make estimated tax payments? This is premium content

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? This is premium content

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...

UPDATES! How have recent tax laws changed the withholding taxes on my equity compensation? This is premium content

Tax rates for people in the highest ordinary income brackets rose under the American Taxpayer Relief Act and the Affordable Care Act. The table in this FAQ outlines the income levels that trigger changes in the withholding of federal and FICA taxes...
Show More FAQs (22 more)

Too much Social Security tax was withheld. How do I recover the excess amount? This is premium content

When too much Social Security tax is withheld above the Social Security wage base during a calendar year, your recovery approach depends on whether...

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...

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? This is premium content

IRS rules do not allow you to specify your tax-withholding rate. Instead, employers usually...

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

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? This is premium content

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 state and local taxes? This is premium content

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

What are the federal tax-withholding rates on stock compensation? Can my company use a different rate? This is premium content

Supplemental income, such as stock compensation, is subject to one of two flat rates that are linked to rates in the income tax brackets. The rate that applies to your supplemental income depends on the...

What is backup withholding? How do I prevent it or recover it? This is premium content

Backup withholding is a form of tax withholding on income from stock sales, along with interest income, dividends, or other types of payments that are reported on Form 1099. Your brokerage firm is required to make backup withholding if you are...

UPDATES! How does a non-US resident reclaim US backup withholding? This is premium content

If you are a nonresident alien and do not complete and file Form W-8BEN with the IRS upon receiving stock-sale proceeds, such as those stemming from equity awards, your brokerage firm will assess backup withholding on the proceeds. To reclaim backup withholding, take the following steps...

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

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? This is premium content

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...

How soon after an NQSO exercise must the withholding taxes be paid to the IRS? Is the timing different for a cashless exercise? This is premium content

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 respond? This is premium content

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...

Do the NQSO tax rules, withholding, and tax-return reporting differ if I am an independent contractor, consultant, or outside director and not an employee? This is premium content

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? This is premium content

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? This is premium content

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...

If I leave my company to become a consultant, retire, or take another job, will taxes be withheld from my equity grants as they were when I was an employee? What if I live in another state when I receive the income? This is premium content

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? This is premium content

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? This is premium content

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...

UPDATES! Are my stock grants affected by the rules of deferred compensation under IRC Section 409A? This is premium content

A number of tax law provisions and interpretations that may affect your stock grants occur in...