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While changes in tax-return reporting that involve equity compensation and company shares are slighter than in recent years, there are a few modifications you should be aware of when preparing your tax return for 2022. The key changes are summarized in brief below. For a fuller discussion of forms and reporting for the 2023 tax-filing season, see the related article on this website: Tax Season 2023: What You Must Know About Reporting Rules.
IRS Form 1040
One change in the 2022 Form 1040 is that the previous Line 1, where you used to report income shown in Box 1 of Form W-2, is now broken out into Lines 1a through 1z. Box 1 income on Form W-2 includes stock compensation as well as salary income. That amount is now entered on Line 1a of Form 1040.
Schedule 1 Of Form 1040
Should your company not report your employee stock compensation income on Form W-2, the revised Schedule 1 for the 2022 tax year indicates that the amount goes on Line 8k (“Stock Options”) in the “Other Income” section of Schedule 1. Note that this has changed. Last year, the first year this reporting was given its own line on Schedule 1, it was Line 8j.
If you are not certain that all equity compensation left off your W-2 goes on Line 8k, then it can fit into Line 8z (“Other Income. List type and amount”).
The total for “Additional Income” from Part I of Schedule 1 goes into Line 8 of Form 1040.
IRS Form 1099-NEC For Nonemployees
For employees, tax withholding occurs at NQSO exercise or restricted stock/RSU vesting, and the income appears on Form W-2. For nonemployees, such as consultants and directors, there is no withholding. The income from exercise or vesting appears on IRS Form 1099-NEC (“Nonemployee Compensation”) as self-employment income. (Before 2020, it was Form 1099-MISC.)
Income is reported on Form 1099-NEC in Boxes 1 and 7. You report this income on Schedule C of your Form 1040 tax return. The IRS instructions for Schedule 1 (see the discussion above) make it clear that this income does not go under "Other Income" on Schedule 1 or on Line 1a of Form 1040.
As the income is self-employment income, you also need to calculate on Schedule SE any Social Security and Medicare taxes that you owe.
Rules For Cost-Basis Reporting
For stock sales, the IRS has not changed the confusing rules on how the cost-basis information is reported on Form 1099-B. For grants made in 2014 and later years, brokers are prohibited from including equity compensation income (which appears on Form W-2) in the cost basis reported on Form 1099-B. This can easily lead to mistakes with the reporting of stock sales from stock compensation on IRS Form 8949 and Schedule D. A related article on this website has a full explanation of this tax reporting: Get The Cost Basis Right To Avoid Overpaying Tax On Stock Sales: Understand IRS Forms 1099-B And 8949 For Tax Returns.
See the section Reporting Company Stock Sales in this website’s Tax Center for guidance on the tax-return reporting for sales of shares acquired through stock compensation, including annotated diagrams of Form 8949 and Schedule D.
Extensions For Natural Disasters
The IRS routinely postpones the filing due date for taxpayers in areas affected by natural disasters. You can find out whether you qualify for a postponement in the IRS website section Tax Relief In Disaster Situations. For example, in most of California the April 18 due date for 2022 tax returns has been extended to October 16, 2023, because of the extensive rain, flooding, and landslides in early 2023.
Checklist Of Documents To Gather
The table below provides a handy checklist of documents you need to report stock sales acquired from equity awards or an ESPP.
|IRS forms to gather||Additional information and forms|
|Form W-2 for the year of exercise/vesting/purchase.||Form 1040 for the year of exercise/vesting/purchase to see the income reported. This helps with the cost-basis calculation.|
|Form 1099-B from the broker or transfer agent.||Supplemental information (if any) provided by the broker to help with the cost-basis adjustments and gain/loss calculation.|
|Form 3921 for ISO exercises; Form 3922 for ESPP purchases.||Confirmations for exercise, purchase, vesting, and/or stock trade from the company or the stock plan provider. Paystubs may help too.|
When you are ready, the annotated diagrams of Form 8949 and Schedule D in this website's Tax Center will walk you through the process of reporting stock sales on your tax return.