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 for the purposes of withholding federal income tax, which is withheld at the minimum required withholding percentage for supplemental income. This flat rate is 22%, though the less common W-4 rate is permissible. (The withholding rate is 37% for aggregate supplemental income in excess of $1 million during a calendar year.)
In addition, state tax withholding also applies (if your state has an income tax), along with federal FICA taxes (Social Security up to the yearly maximum and Medicare).
For the reporting of this withholding on your Form W-2, see the annotated example in the Tax Center.