ESPPs: 6 Big Tax-Return Mistakes You Can Avoid By Reading This Article

While the tax-return filing deadline has been postponed to May 17, the potential for confusion and mistakes on tax returns involving stock compensation remains as great as ever. It looms especially large when you have shares acquired from an employee stock purchase plan (ESPP), whose basic taxation is already confusing enough. ESPP reporting even confuses experienced accountants and other tax experts. Errors can lead to tax overpayments or, much worse, scrutiny from IRS auditors.

However, the benefits of ESPPs are well worth the tax complexity. ESPPs can be very valuable for employees, as explained in an article at myStockOptions, and a little tax guidance goes a long way. In the article below, we explain six big reporting mistakes to avoid when you have ESPP compensation income or sell shares acquired from purchases under your plan. Some of these also apply when you have stock options or restricted stock units.

1. Paying tax too early on the discount. While there are various types and designs for ESPPs, a tax-qualified ESPP under Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15%. When this type of ESPP is involved, you should not include the discount as part of your taxable income for the year of purchase unless you also sold the shares in the same year.

When you don't satisfy the ESPP holding periods (more than two years from enrollment and one year from purchase), you have compensation income in the year of sale equal to the spread at purchase, i.e. the difference between the fair market value of the stock on the purchase date and the discounted price you actually paid for it.

Example: Your company offers a 15% discount with a lookback that calculates it on the lower of the stock price at the offering start or on the purchase date.

• Market price: $50 at the start of the offering and $55 on the purchase date
• Purchase price: $42.50 (85% of $50)

For ESPPs that are not tax-qualified under IRC Section 423, the taxation is similar to that of nonqualified stock options (NQSOs). The purchase income for this type of ESPP is reported and appears on your Form W-2 for the year of purchase, regardless of whether you sell the stock, and the same reporting issues for NQSOs apply after you sell the shares.

2. Not filing Form 8949 after an immediate sale of ESPP shares at purchase. With an immediate sale of your ESPP shares at purchase, the discount is reported on your Form W-2 and on your tax return as ordinary income. Even though you never held the stock (or at least not for long) after purchase, you still need to report this sale transaction on Form 8949 and Schedule D, which are used to report capital gains and losses on all stock sales.

You may even have some small gains or losses, depending on how your company calculates the discount at purchase, how long it takes for the shares to become available in your account, and any commissions and fees for the stock sale.

Alert: If the IRS were to receive a report of your sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, it would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a CP2000 notice for taxes due on the full amount of the sale proceeds.

3. Directly using what appears as the cost basis on your Form 1099-B. Under IRS rules, the Form 1099-B issued to you by your broker cannot report the compensation element as part of your cost basis. Only the purchase price will appear, and the basis does not need to be included for stock that was purchased before 2011. This means you must check the accuracy of the basis and make any necessary adjustments on Form 8949.

Alert: When compensation income is not part of the tax basis reported in Box 1e on Form 1099-B, make a gain or loss adjustment in column (g) of Form 8949, and enter code B in column (f), among other steps. Should Box 1e be blank, report the full basis in column (e).

See the section Reporting Company Stock Sales at myStockOptions for our popular annotated diagrams of Form 8949. These show the proper tax-return reporting for sales of shares acquired from ESPPs, stock options, and restricted stock units.

4. Paying the wrong tax on the discount. The full ESPP purchase discount doesn’t qualify for capital gains treatment even when you have held your stock for more than one year after the date of purchase, and for more than two years after the beginning of the offering period. With a tax-qualified (Section 423) ESPP, you’ll still have ordinary income in the year of sale equal to the lesser of either the actual gain upon sale or the purchase price discount at the beginning of the offering. But beyond the discount, all additional gain is treated as long-term capital gain.

5. Using the wrong price when there is no lookback. If your company’s ESPP does not have a lookback feature, the actual discount for the stock purchase and for tax purposes will often differ with a qualifying disposition that provides the best tax treatment, adding to the potential for tax-return mistakes. Even with an ESPP that has no lookback, the purchase price discount for calculating the ordinary income for the taxes is still computed from the price on the first day of the offering period and not on the purchase date.

6. Paying tax twice on the discount. With ESPPs, the purchase discount for tax purposes is reported to the IRS on Form W-2 and is included in your income in the year of sale. Thus, when you sell the shares, do not make the purchase price your cost basis without following other steps when you complete Form 8949 to report the sale. Avoid double taxation on the discount by understanding what the cost basis on your 1099-B includes, why it may be wrong, and how to make an adjustment on that IRS form (see #3 above).

You will also mistakenly double-report income if you do not realize that your W-2 income in Box 1 already includes stock compensation income. What your company may have voluntarily reported in Box 14 of Form W-2 does not change the Form 1040 reporting. You may wrongly think it was left out of Box 1 because there is no tax withholding or employment tax (i.e. Social Security and Medicare) on a tax-qualified ESPP, and then erroneously report the income as “Other income” on Schedule 1.

Doing that would cause the income to be taxed twice as ordinary income, as it was already included in the W-2 income reported on Line 1 of Form 1040.

Tax-Season Resources

For more guidance on tax returns that involve stock compensation, whether stock options, restricted stock units, employee stock purchase plans, or performance shares, see the articles, FAQs, and annotated diagrams of IRS forms in the Tax Center at myStockOptions. Just for fun, try the tax-return quiz to test your knowledge.

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ESPP Power: Market Turbulence Of 2020 Showcases The Unique Benefits Of Employee Stock Purchase Plans

Despite the torrent of market turbulence and volatile stock prices, many participants in employee stock purchase plans (ESPPs) have seen good returns in 2020. In fact, the stock-price volatility of 2020 provides a great example of why ESPPs are such a good deal. According to data from Fidelity Investments, employees with purchases in tax-qualified Section 423 ESPPs at the stock-price lows in March and April saw gains of over 40% by mid-June, after the market rebound. Read on for this rare good-news story of the current economic cycle.

Unique Benefits Of ESPPs

While there are various kinds of ESPPs, the most common type is known as a Section 423 plan, named after the part of the tax code that provides rules for it and the favorable taxation of the purchase discount. ESPPs with a purchase discount function a lot like stock options: employees get to buy company stock at less than the stock's market price. The features of these ESPPs include:

• after-tax contribution from your pay
• a set offering period when payroll deductions occur
• set purchase dates that use the accumulated deductions
• typically a discount on the stock-purchase price

With stock options, the exercise (purchase) price is the market price at the time of grant regardless of whether the stock price has fallen or risen since grant. Options can therefore be "underwater" if the exercise price is higher than the current stock price. By contrast, ESPP participation can never be underwater, as any discount comes off whatever the stock price is.

In fact, ESPPs with a discount and a lookback provision can even be a good deal even in a down market because you get the discount off either the start-date price or the purchase-date price, whichever is lower. Even if you do not have a lookback, you still get a discount off the market price on the purchase date.

Example: Your company uses a 15% discount with a six-month lookback.

• The offering date price is $10.
• The stock market price on the purchase date is $8.
• Your purchase price is $6.80 (85% of $8, not 85% of 10).
• In the price-drop example, your initial gain is 17.64% ($1.20 spread at purchase divided by $6.80 purchase price), before any change in the stock price after purchase

Data Shows Big Gains For Employees With Purchases In Down Markets

If the stock price then bounces back up after the purchase, ESPP participation can become very profitable. According to data from Fidelity Investments, employees at companies with ESPP purchases during the stock-price lows of March and April experienced meaningful gains of over 40% in the market rebound as of mid-June.

Of the Section 423 ESPPs that Fidelity Stock Plan Services manages for companies of varying sizes and industries, 48% of them had purchase dates for employees in March or April 2020, during the big stock-market decline. Fidelity looked at Section 423 plans with a 15% purchase price discount, both with or without a lookback, and quarterly or semiannual purchases that occurred in those months (i.e. purchase date every 3 or 6 months during the ESPP offering).

Fidelity found that, of those with lookback features, 32% of the companies used the offering-date stock price for the purchase-price calculation (i.e. stock price was still higher on purchase date), while 68% used for the calculation the lower price on the purchase date. Return on investment (ROI) for these employees in Section 423 ESPPs:

• All but two companies had positive ROI for employees as of June 17. At three companies, the price declined from the purchase-date stock price but positive ROI was still generated for employees based on discounted purchase price.
• At almost 96% of the companies, the positive ROI for employees in the ESPPs spans from 10%+ to 100%+ as of June 17 for those that held their companies’ shares.

With most ESPPs, you can withdraw from an offering or decrease your salary contribution percentage. Once the impact of Covid-19 hit the economy, it may have been tempting for employees to pull out of their ESPPs and use the money for immediate needs. However, Fidelity's data shows the wisdom of sticking with your ESPP, which can be an effective and disciplined form of investing at regular intervals, similar to dollar-cost averaging.

"Democratizing" Wealth Accumulation

For Emily Cervino, Head of Thought Leadership at Fidelity Stock Plan Services, Fidelity's 2020 ESPP data tells a very encouraging story about the significant wealth-building potential ESPPs present for employees at all levels. ESPPs can provide employees with some insulation from stock-market volatility when they have certain design features, she explained to me. “Thanks to the ESPP discounts and the market recovery, most of our [plan] participants have had impressive gains in their March and April purchases,” she added. “For many companies, the ESPP has been a bright spot in an otherwise difficult time.”

Another special aspect of ESPPs is that eligibility is usually companywide for employees at all levels. By contrast, at many public companies stock options and restricted stock units are granted only to certain employees and executives. Under the IRS rules for Section 423 ESPP plans, companies can exclude workers only for very specific reasons, such as being employed for less than two years. With broad-based participation, ESPPs can thus perhaps even play a small rule in reducing income inequality, including the racial wealth gap.

In Emily's words, ESPPs can therefore play a role in "democratizing wealth accumulation." These plans are not about executive compensation, she emphasized, as ESPPs provide the same financial benefit “from the very top to the very bottom of the organization.” Plus, as the coronavirus pandemic reveals the wisdom of stockpiling emergency savings, it is crucial to note that ESPPs can help employees build savings faster—whether by selling the shares to bank the cash proceeds or holding shares that keep going up in price.

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How Employee Stock Purchase Plans Can Offer Shelter In Down And Volatile Markets

Underwater employee stock options present a familiar predicament: grants in which the market price of the company’s stock is cheaper than the option exercise price make the options worthless, at least temporarily. Companies have well-established choices for dealing with this situation. But how do falling stock prices affect other forms of equity compensation?

Employee stock purchase plans (ESPPs) function a lot like stock options. You purchase your company’s shares, typically at a discount. However, there are key differences in their dynamics when the stock price declines. Sometimes an ESPP can still be a good deal even when the company's stock price falls.

Here's what you need to know for participating in your company’s ESPP with a falling or volatile stock price.

The Good News: ESPPs Can’t Go Underwater

ESPPs cannot be underwater in the traditional sense of having a purchase price greater than the current stock price. With an ESPP, the market price of the stock at the beginning of an offering does not completely control your actual purchase price, unlike with stock options, where the exercise (purchase) price is the market price at the time of grant.

In fact, ESPPs with a discount and a lookback provision for calculating it can be a good deal even in a down market. This is because you get to take the discount off either the start-date price or the purchase-date price, whichever is lower. If you do not have a lookback, you still get a discount off the market price on the purchase date.

Example: The stock price at the start of the offering is $14. The price on the purchase date is $10. The 10% discount is applied to the lower purchase-date stock price, resulting in a $9 purchase price. By contrast, if you had stock options that were granted with a $14 exercise price, a stock price of $10 would make the options underwater.

Volatility Does Not Always Matter

With most ESPPs, what matters is the stock price at the start of the offering period and on the purchase date. A big drop in the stock price during the offering period that mostly recovers before the purchase date does not affect your purchase price.

Example: Your company’s stock price is $14 on January 2, when the offering period starts. It falls to $9 by late March due to the impacts of the Covid-19 pandemic. On the purchase date six months after the offering start (July 2), the stock price has recovered to $13. The ESPP discount in the purchase price is taken off the $13 stock price on July 2.

The Bad News: Limits On The Amount Of Stock You Can Purchase

When your company’s stock price falls, you may not be able to purchase as many shares as you would like at the lower price. It depends on the amount of your payroll contribution (e.g. 10% of your salary).

With a tax-qualified Section 423 ESPP, under IRS rules you are allowed to purchase up to $25,000 worth of stock in a calendar year, though your company can set a lower limit. (For details about the $25,000 limit and how it works, see the related FAQ at myStockOptions.)

The value of your stock for this $25,000 limit depends on the stock’s undiscounted price when the offering begins, not at the purchase date. Let’s say your purchase discount is 10%, the stock price on the offering date is $20, and the stock price on the purchase date is $10. You can buy up to 1,250 shares ($25,000 divided by $20), not 2,778 shares ($25,000 divided by $9 purchase price). This can mean that your company refunds any amount contributed from your salary for an ESPP purchase over $11,250 (1,250 shares at $9 per share). However, if your payroll contribution for your ESPP is usually $11,250 or less, the lower share price does allow you to buy more shares than you would be able to if the price rose during the purchase period.

Special Plan Features In Down Markets

When its stock price falls by the purchase date, your company may have a rollover provision. During a long offering period (e.g. 24 months) with a six-month purchase period, a rollover automatically withdraws you and then re-enrolls you. This lets you take advantage of the lower lookback price, both for the $25,000 calculation and for when the market rises (hopefully) during the full offering period. This restart feature may be automatic or at the discretion of your company.

Alternatively, your company may have an automatic reset. This type of provision is also triggered when the market value on the purchase date is lower than it was at the enrollment date. The lower price on the purchase date is reset to become the lookback price (no new offering period started).

ESPP Benefits Are Worth The Complexity

For a detailed look at ESPP dynamics and tax treatments with a falling share price when you sell the ESPP stock, see the article Fundamentals Of Employee Stock Purchase Plans (Part 4): Down Markets And Other Tax Topics at myStockOptions.

As explained by The Great Benefits Of Your Company’s Employee Stock Purchase Plan, in any market conditions you should take full advantage of your company’s employee stock purchase plan. ESPPs offer an easy, efficient, painless, and rewarding way to pursue a disciplined savings plan and build your financial resources for the long term.

Why Employee Stock Purchase Plans Are A Great Deal: Understanding Key ESPP Features

An employee stock purchase plan (ESPP) is a great deal. It lets you use after-tax payroll deductions to buy shares of your company's its stock, often at a discount (and even if there is no discount, you still pay no commission). In this blog commentary, we explore the key features of ESPPs that you need to understand to make the most of your company's plan.

Type Of ESPPs

In an ESPP that follows the rules under Section 423 of the tax code, the purchase discount can be up to 15% off the market price of the company's stock. That type of ESPP is called a "qualified" ESPP. Other types of ESPPs are either nonqualified plans or direct purchase plans. An ESPP that is tax-qualified under Section 423 offers favorable tax treatment of the purchase discount when you hold the shares long enough (more than two years from your enrollment date and one year from purchase).

Biggest Potential Gains When Plan Has Lookback For Setting Purchase Price

An ESPP discount is a good benefit. It's even better when the plan also has a lookback provision. A lookback takes the purchase-price discount from either the stock price at the start of the offering or the stock price on the purchase date, whichever is lower. If the stock price rises between the offering date and the purchase date, your discount is based on the lower offering-date price. Even if the stock price falls between the offering date and purchase date, you still profit because your discount comes off the lower stock price on the purchase date. This means that, unlike stock options, an ESPP with a lookback cannot go underwater.

Example: Your company's ESPP has a 15% discount with a six-month lookback.

• The stock price on the offering date is $10 per share.
• The stock price on the purchase date is $12 per share.
• With the lookback, your purchase price for stock worth $12 is only $8.50 (15% of $10).
• This gives you a gain of 41% ($3.50 spread at purchase divided by $8.50 purchase price).
• If instead the stock price falls to $8 on the purchase date, your purchase price is $6.80.
• Even after that price drop, you still have an increase of 17.64% ($1.20 spread at purchase divided by $6.80 purchase price).

Another advantage of an ESPP is that you can often sell the shares easily to pay for immediate cash needs or to reinvest in other long-term savings. By contrast, company stock in your 401(k) can be sold only for other investments in the plan.

The taxation and special tax requirements of shares purchased under a Section 423 ESPP are detailed by our articles, FAQs, and videos in the section ESPPs: Taxes at myStockOptions.com.

Top Questions To Ask About Your ESPP

Before you participate in your company's employee stock purchase plan, you want to understand its key terms, rules, and dates. These affect whether you want to participate, how much salary you want to contribute for stock purchases, and how to fit the ESPP into your financial plan. Become familiar with the essential features of ESPPs by asking the questions on the following checklist:

1. What type of ESPP is it?
2. When am I eligible to participate?
3. Does the ESPP have a purchase discount? Does it have a company match, which would make it a nonqualified plan?
4. Does the plan have a lookback feature?
5. How long is the offering period for the salary deductions?
6. Are there shorter purchase periods within the offering period? Example: 12-month offering period with two separate six-month purchase periods.
7. How do I enroll in the ESPP? Once enrolled, am I automatically enrolled in subsequent offering periods?
8. Is there a maximum contribution amount/percentage and number of shares I can purchase with my eligible compensation? Related to this question, how and when can I increase or decrease my contribution percentage, or withdraw from an ESPP offering?
9. Is there a mandatory transfer restriction or holding period after share purchases? Many companies require you to keep the ESPP shares with a specific brokerage firm or transfer agent to track the tax reporting. Some prevent you from flipping shares at purchase by enforcing a holding period.
10. How will the ESPP fit into my financial planning for long-term goals (e.g. house purchase, college funding, retirement savings) and more immediate goals (e.g. medical expenses, car purchase, vacation).

How To Answer These ESPP Questions

Unlike most grants of stock options or restricted stock/RSUs, ESPPs are broad-based (i.e. open to all or most employees). Therefore, you will probably learn about your company's plan during your orientation or when a new ESPP is rolled out.

Before you participate in an ESPP, you should review the plan documents: these state the plan's terms, features, and procedures and include enrollment forms (usually online). If the materials are not on your company's intranet, ask your HR department for a copy of the plan materials and confirm whether you are eligible to participate and when the next enrollment date occurs.

For examples of documents that created ESPPs in 2019 and outline their structure, see the ESPPs offered by two high-profile IPO companies, Uber and Levi Strauss.

Employee Stock Purchase Plans: The Biggest Tax-Return Mistakes To Avoid

The potential for confusion and mistakes on tax returns looms large for people who sold shares acquired from employee stock purchase plans (ESPPs), whose basic taxation is confusing enough to begin with. Understanding the important issues will help you to prevent overpaying your taxes or incurring complications with the IRS for underpaying.

Below we present five common errors (and how to avoid them) that involve misreporting income from ESPP purchases or stock sales on your tax return. See also the Tax Center at myStockOptions.com for comprehensive coverage of tax-return topics involving ESPPs and all other types of equity compensation.

1. Not filing Form 8949 after an immediate sale of ESPP shares at purchase. With an immediate sale of your ESPP shares at purchase, the discount is reported on your W-2 and on your tax return as ordinary income. Even though you never held the stock (or at least not for long) after purchase, you still need to report this sale transaction on Form 8949 and Schedule D, which are used to report capital gains and losses on all stock sales. You may even have some small gains or losses, depending on how your company calculates the discount at purchase, how long it takes for the shares to become available in your account, and any commissions and fees for the stock sale. For an annotated example showing how you report this on these forms, see a related FAQ at myStockOptions.com.

Alert: Even if you sold all of your ESPP stock immediately at purchase and all of the resulting income is on your W-2, you still must report the sale on Form 8949 and Schedule D. If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, it would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice for the taxes due.

2. Paying tax on the discount too early. Depending on the design of your company's ESPP, Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15% off the fair market value of your company's stock. You should not include the discount as part of your taxable income for the year of purchase unless you also sold the shares in the same year. When you don't satisfy the ESPP holding periods, you have compensation income in the year of sale equal to the spread at purchase, i.e. the difference between the fair market value of the stock on the purchase date and the discounted price you actually paid for it.

For sales of shares acquired from ESPPs that are not tax-qualified under IRC Section 423, the taxation, along with the potential reporting mistakes, is similar to that for NQSOs. The income would be reported, and would appear on your W-2, in the year of purchase, regardless of whether you sell the stock. For details and an example of the tax treatment, see the related FAQ at myStockOptions.com.

3. Directly using what appears as the cost basis on your Form 1099-B. The expanded Form 1099-B cannot report the compensation element as part of your cost basis, as only the purchase price will appear, and the basis does not need to be included for stock that was purchased before 2011. (For details, see a related article at myStockOptions.com.) This means you must check the accuracy of the basis and make any necessary adjustments on Form 8949.

See the section Reporting Company Stock Sales for annotated diagrams of Form 8949 for ESPP stock sales.

4. Paying the wrong tax on the discount. The discount doesn't qualify for capital gains treatment even when you have held your stock for longer than one year. If you hold the shares for more than one year after the date of purchase, and more than two years after the beginning of the offering period, with a tax-qualified (Section 423) ESPP you'll have ordinary income in the year of sale equal to the lesser of either the actual gain upon sale or the purchase price discount at the beginning of the offering. But beyond the discount, all additional gain is treated as long-term capital gain. However, with a decreasing stock price, when you sell the shares at a loss you have no ordinary income, just a capital loss. Only in that situation, with all capital loss, will the cost basis on Form 1099-B be correct and not need an adjustment.

5. Using the wrong price when there is no lookback. If your company eliminated the lookback for your ESPP, the actual discount for the purchase and for tax purposes will often differ with a qualifying disposition, adding to the potential for tax-return mistakes. Even with an ESPP that has no lookback, the purchase price discount for the taxes is still computed from the price on the first day of the offering period and not on the purchase date, as a related FAQ at myStockOptions.com explains.

For five further crucial tips on tax-return reporting with ESPPs, see the full FAQ about this topic in the Tax Center at myStockOptions.com. In addition, see other FAQs for the biggest tax-return blunders to avoid with stock options, restricted stock and RSUs, and stock appreciation rights. The Tax Center also has FAQs with annotated diagrams showing the tax-return reporting for sales of shares acquired from equity compensation.

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Employee Stock Purchase Plans: Survey Shows Link Between Participant Education And ESPP Success

We are big fans of employee stock purchase plans (ESPPs). They allow ordinary employees to become company shareholders and build wealth. At a socio-economic level, ESPPs can thus perhaps even reduce income inequality, as can other forms of equity compensation. On myStockOptions.com, we have so much content on ESPPs that we could be called myESPP.com as well.

Studies about trends in ESPP design can be hard to find. Fortunately, the National Association of Stock Plan Professionals (NASPP), the National Center for Employee Ownership (NCEO), and the Certified Equity Professional Institute recently published data from their joint 2016 ESPP survey. The survey results are summarized at the website of the NASPP. Responses were received from 239 companies, 91% of which have tax-qualified Section 423 ESPPs. Among the findings of interest:

• 70% of respondents offer a 15% discount.
• 50% have a six-month offering period.
• 56% base the purchase price on the price at the beginning or the end of the offering period, whichever is lower.
• 79% do not have a required holding period.
• 54% spend less than 0.5% of their total compensation budget on the ESPP, while 21% spend between 0.5% and 0.9%.
• 24% report that they do not use any particular way of communicating the plan to their employees. Among those that do use specific communication channels, the most common means are email (93%) and the company website/intranet (90%).
• 36% of the companies are very satisfied with their ESPPs, and another 36% of them are somewhat satisfied; 25% percent report feeling neutral about their ESPPs; and 3% are dissatisfied with their ESPPs. 

That last point is especially interesting. Not surprisingly, the companies that report spending more on participant education tend to also have a higher level of satisfaction with their ESPPs. As the NASPP observes in its summary of the results, companies therefore "might be wise to consider investing more in educating employees about their plans." With features such as those mentioned in the survey, an ESPP can be a really good financial deal for employees.

The full survey results, plus analysis of them, can be purchased from the NCEO.

Tax Reporting For Stock Compensation: Understanding Form W-2, Form 3922, And Form 3921

The end of January is in sight. Along with snowflakes, personal tax-return documents are in the air—or rather, hopefully either in your safe possession or on their way to you. When you have stock compensation, tax-return documents and the information they contain can be confusing and hard to decipher.

Making Sense Of Form W-2 When Stock Compensation Is Reported

Employees who had income from stock compensation or an employee stock purchase plan in 2015 must understand where that income is reported on Form W-2 so that they can complete their tax returns properly. In the Tax Center at myStockOptions.com, we have a section of FAQs about Form W-2 reporting for stock compensation. Each one includes an annotated diagram of Form W-2 that clearly interprets this sometimes cryptic document.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income is included in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case, the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Form 3922 For ESPPs And Form 3921 For ISOs

Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2015, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).

Alert: In 2016, the amount of the IRS penalty doubled for companies that file information returns late or fail to distribute the employee statements.

For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

Annotated Diagrams Of Forms 3922 And 3921

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers.

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

Sell Shares In 2015? The Fun Is Just Beginning

If you sold shares from stock compensation or an ESPP last year, you will need guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting. These FAQs clearly explain how the information on Forms W-2, 3922, and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return.

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

Employee Stock Purchase Plans: The Biggest Tax-Return Mistakes To Avoid

"April is the cruellest month," wrote the poet T.S. Eliot. It certainly can feel that way if you have not yet filed your federal tax return as the IRS deadline of April 15 approaches—and especially so if you are daunted by the complexity of the tax rules that apply to your income. In particular, the 2015 tax season has the potential to be more confusing than most if you sold stock in 2014.

The potential for confusion and mistakes on tax returns looms large for people who sold shares acquired from employee stock purchase plans (ESPPs), whose basic taxation is confusing enough to begin with. Understanding the important issues will help you to prevent overpaying your taxes or incurring complications with the IRS for underpaying. 

The paragraphs below present some common errors (and how to avoid them) when reporting sales of ESPP shares on your tax return. See also the Tax Center at myStockOptions.com for comprehensive coverage of tax-return topics involving ESPPs and all other types of equity compensation.

Alert: If you sold stock during the tax year, you must file with your tax return IRS Form 8949 along with Schedule D, using what your brokerage firm reports to you on IRS Form 1099-B. The information on Form 1099-B has changed for stock sales made in 2014, creating special issues for stock compensation (see a related FAQ on myStockOptions.com).

1. Not filing Form 8949 after an immediate sale of ESPP shares at purchase. With an immediate sale of your ESPP shares at purchase, the discount is reported on your W-2 and on your tax return as ordinary income. Even though you never held the stock (or at least not for long) after purchase, you still need to report this sale transaction on Form 8949 and Schedule D, which are used to report capital gains and losses on all stock sales. You may even have some small gains or losses, depending on how your company calculates the discount at purchase, how long it takes for the shares to become available in your account, and any commissions and fees for the stock sale. For an annotated example showing how you report this on these forms, see a related FAQ at myStockOptions.com.

Alert: Even if you sold all of your ESPP stock immediately at purchase and all of the resulting income is on your W-2, you still must report the sale on Form 8949 and Schedule D. If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, it would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice about the taxes due.

2. Paying tax on the discount too early. Depending on the design of your company's ESPP, Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15% off the fair market value of your company's stock. You should not include the discount as part of your taxable income for the year of purchase unless you also sold the shares in the same year. When you don't satisfy the ESPP holding periods, you have compensation income in the year of sale equal to the spread at purchase, i.e. the difference between the fair market value of the stock on the purchase date and the discounted price you actually paid for it.

For sales of stock from ESPPs that are not tax-qualified under IRC Section 423, the taxation, along with the potential reporting mistakes, is similar to that for NQSOs. The income would be reported, and would appear on your W-2, in the year of purchase, regardless of whether you sell the stock. For details and examples, see the section ESPPs: Taxes Advanced on myStockOptions.com.

3. Directly using what appears as the cost basis on your Form 1099-B. The expanded Form 1099-B does not need to report the compensation element of your cost basis, and the basis does not need to be included for stock that was purchased before 2011 (see a related article for details). This means you must check the accuracy of the basis and make any necessary adjustments in the 1099-B data on Form 8949.

Alert: If compensation income is not part of the tax basis reported in Box 1e on Form 1099-B, make an adjustment in column (g) of Form 8949. Should Box 1e be blank, report the full basis in column (e).

For annotated diagrams of Form 8949 involving ESPP stock sales, see the section Reporting Company Stock Sales on myStockOptions.com.

4. Paying the wrong tax on the discount. The discount doesn't qualify for capital gains treatment even when you have held your stock for longer than one year. If you hold the shares for more than one year after the date of purchase, and more than two years after the beginning of the offering period, with a tax-qualified (Section 423) ESPP you'll have ordinary income in the year of sale equal to the lesser of either the actual gain upon sale or the purchase price discount at the beginning of the offering. But beyond the discount, all additional gain is treated as long-term capital gain. However, in a down market, when you sell the shares at a loss you have no ordinary income, just a capital loss.

5. Using the wrong price when there is no lookback. If your company eliminated the lookback for your ESPP, the actual discount for the purchase and for tax purposes will often differ with a qualifying disposition, adding to the potential for tax-return mistakes. Even with an ESPP that has no lookback, the purchase price discount for the taxes is still computed from the price on the first day of the offering period and not on the purchase date, as explained by a related FAQ at myStockOptions.com.

6. Paying tax twice on the discount. With ESPPs, the purchase discount is reported to the IRS on Form W-2 and is included in your income in the year of sale. Thus, when you sell the shares, do not make the purchase price your cost basis when you complete Form 8949 to report the sale. Avoid double taxation on the discount by understanding what the cost basis on your 1099-B includes and why it may be wrong (see #3 above).

You will also mistakenly double-report income if you do not realize that your W-2 income in Box 1 already includes stock compensation income. You may wrongly think it was left out because there is no tax withholding or employment tax (i.e. Social Security and Medicare) on a tax-qualified ESPP, and then erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2014 form). If you do this, you will be taxing the ESPP discount twice as ordinary income. You use Line 21 only when your company mistakenly omits the income from your W-2.

For other crucial tips on tax-return reporting with ESPPs, see the full FAQ about this topic on myStockOptions.com. In addition, see other FAQs for the biggest tax-return blunders to avoid with stock options, restricted stock and RSUs, and stock appreciation rights.

Making Sense Of IRS Form 3922 (ESPPs) And IRS Form 3921 (ISOs)

Whatever the groundhog prognosticates about the remaining winter, we know for sure that tax-return season is coming. As this blog recently stated, employees should by now have received Form W-2 from their companies. If you had income from stock compensation or an employee stock purchase plan in 2014, you must understand where that income is reported on Form W-2 so that you can complete your tax return properly (for help, see our FAQs with annotated W-2 diagrams).

But Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2014, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic). For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

The Uses Of Forms 3922 And 3921

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. This content is available in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers. Our articles and FAQs are also individually available for licensing (for details, please contact us at [email protected]).

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

If last year you sold shares acquired from an ESPP or from ISOs, you will want to see the FAQs of the section Reporting Company Stock Sales in the Tax Center at myStockOptions.com. These FAQs clearly explain how the information on Forms 3922 and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return. The FAQs also have helpfully annotated diagrams of Form 8949 and Schedule D.

Making Sense Of IRS Form 3922 For ESPPs And IRS Form 3921 For ISOs

Last year, did you buy shares in your company's employee stock purchase plan (ESPP) or exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic). For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While these forms may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, accurate and timely tax-return reporting is more important than ever.

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ just on Form 3922 for ESPPs and an article and FAQ just on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. This content is available in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers. Our articles and FAQs are also individually available for licensing (for details, please contact us at [email protected]).

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

If last year you sold shares acquired from an ESPP or from ISOs, you will want to see the FAQs of the section Reporting Company Stock Sales in the Tax Center at myStockOptions.com. These FAQs clearly explain how the information on Forms 3922 and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return. The FAQs also have helpfully annotated diagrams of Form 8949 and Schedule D.

Employee Stock Purchase Plans: Recent Survey And New Research Show The Persistence And Importance Of ESPPs

We have always been a big fan of employee stock purchase plans and have an extensive section about ESPPs on myStockOptions.com. A new survey by Fidelity, summarized in a press release, reveals that over half of the surveyed companies (51%) plan to modify their ESPPs in the next few years, and that 31% will make their plans more attractive for participants by, for example, increasing the purchase-price discount or adding a lookback provision.

This is a cheering development after some of the trends the NASPP observed in its 2011 stock plan survey. The results showed that, among the surveyed ESPP companies, the percentage with a 15% discount on the purchase price fell from 87%  in 2004 to 71% in 2011, while the percentage with lookbacks dropped from 82% in 2004 to 62% in 2011. (For more survey data on recent ESPP trends, see an FAQ on myStockOptions.com.)

A company's ESPP is generally made available to all of its employees, a refreshing contrast with the recent corporate trend of narrowing the population that receives stock options and restricted stock. It is good to see how companies view their ESPPs, as reflected in Fidelity's survey:

• 50% of the surveyed companies consider an ESPP to be part of the company's benefits package, as opposed to a form of compensation.
• 72% consider ESPPs to be as valuable as pensions and dental benefits, and more valuable than company-provided life insurance.
• 28% believe their employees value their ESPP more than other company benefits.

It is also good to see that this survey generated news-media interest in the benefits of ESPPs. See, for example, articles in the San Francisco Chronicle and in Forbes.

While it is understandable that many employees find ESPPs an alluring way to immediately sell stock for a quick profit (i.e. flipping), an advisor quoted by The Wall Street Journal in an article discussing the Fidelity survey recommends that employees contribute enough to their 401(k) plans to receive any available company match before they consider participating in an ESPP. Other advisors caution ESPP participants to remember the need to diversify investments beyond their own company's stock, and they also encourage employees to fully understand the tax treatment of ESPP participation.

Can ESPP Participation Predict Stock-Price Trends?

In a research paper published on Social Science Research Network (Do Non-Executive Employees Have Information? Evidence From Employee Stock Purchase Plans), professors Ilona Babenko of Arizona State University and Rik Sen of Hong Kong University of Science and Technology examine whether ESPP participation can predict the future direction of a company's stock price. While most academic research on stock trades focuses on what senior executives are doing, this may be one of the first papers that analyzes stock-trading by rank-and-file employees. The researchers found that stock prices of companies in the top half of aggregate ESPP purchases outperform those in the bottom half by up to 8% during  the year after purchases. "Since ESPP purchases reflect the decisions of thousands of employees...they can provide a reliable signal of future performance," the authors claim. They also found that an increase in participation by lower-level employees can be associated with a higher probability of good news ahead for the company, such as a takeover, while a decrease in participation may signal hard times ahead, such as an earnings restatement.

ESPP Mistakes That Can Mess Up Your Tax Return, And How To Avoid Them

The taxation of employee stock purchase plans is confusing. After you sell ESPP shares, the taxes you owe depend on various factors, including the purchase price, the market price at purchase, the price at the start of the offering, the discount, how long you held the stock, and the price at sale. In this blog entry, we present some common tax-return mishaps involving ESPPs and explain how you can avoid them. Understanding these points will help you prevent overpaying your taxes or (perhaps worse) provoking the annoyance of the IRS for underpaying.

Form 3922 Can Help

ESPP purchases in a given tax year are reported on IRS Form 3922 for ESPPs. The form, which your company should issue before the end of the January after the year of purchase, helps you collect information for reporting sales of the shares on your tax return. The forms also give the IRS information about your transactions. For details, see the related FAQ on myStockOptions.com.

Alert: For stock sold during 2011 and later, you must file with your tax return the new IRS Form 8949 along with Schedule D, which has significantly changed upon the introduction of Form 8949. This change stems from the expansion of the information that brokers must report to you on IRS Form 1099-B. The information on Form 3922 can help you calculate the cost basis of your ESPP stock if the cost basis is omitted or too low on Form 1099-B.

Common ESPP Errors On Tax Returns

1. Not filing Form 8949 after an immediate sale of ESPP shares at purchase. With an immediate sale of your ESPP shares at purchase, the discount is reported on your W-2 and on your tax return as ordinary income. Even though you never held the stock (or at least not for long) after purchase, you still need to report this sale transaction on Form 8949 and Schedule D, which are used to report capital gains and losses on all stock sales. You may even have some small gains or losses, depending on how your company calculates the discount at purchase, how long it takes for the shares to become available in your account, and any commissions and fees for the stock sale. For an annotated example showing how you report this on these forms, see a related FAQ on myStockOptions.com.

Alert: If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, it would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice for the taxes due.

2. Paying tax on the discount too early. Depending on the design of your company's ESPP, Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15% off the fair market value of your company's stock. You should not include the discount as part of your taxable income for the year of purchase unless you also sold the shares in the same year. When you don't satisfy the ESPP holding periods, you have compensation income in the year of sale equal to the spread at purchase, i.e. the difference between the fair market value of the stock on the purchase date and the discounted price you actually paid for it.

For sales of stock from ESPPs that are not tax-qualified under IRC Section 423, the taxation, along with the potential reporting mistakes, is similar to that for NQSOs. The income would be reported, and would appear on your W-2, in the year of purchase, regardless of whether you sell the stock. See the section ESPPs: Taxes Advanced for details and examples.

3. Directly using what appears as the cost basis on your Form 1099-B. The expanded Form 1099-B does not need to report the compensation element of your cost basis, and the basis does not need to be included for stock that was purchased before 2011 (see a related article for details). This means you must check the accuracy of the basis and make any necessary adjustments in the 1099-B data that you transfer to Form 8949.

Alert: If compensation income is not part of the tax basis reported in Box 3 on Form 1099-B, make an adjustment in column (f) of Form 8949 and add code B in column (b). Should Box 3 be blank, report the full basis in column (f).

See the section Reporting Company Stock Sales for annotated diagrams of Form 8949 for ESPP stock sales.

Only The Beginning

For six other tax-return blunders involving employee stock purchase plans, see the FAQ on myStockOptions.com that gives full coverage to this topic. Need more background before you proceed? Listen to an engaging summary of basic ESPP concepts in our podcast about employee stock purchase plans. For a general overview of the new developments in IRS forms and reporting for the 2012 tax season, see our special tax-season video.

Despite Overall Slight Decrease, ESPPs Remain Common At High-Tech Companies

What is the state of employee stock purchase plans today? For people (like us) who love survey data, the National Association of Stock Plan Professionals recently shed some light on ESPP usage. In its 2011 Domestic Stock Plan Administration Survey, the NASPP found that the percentage of responding companies which have ESPPs (52%) was slightly lower than it was in its prior survey, in 2007 (60%). Of the companies without an ESPP, 9% reported that they had eliminated their ESPP since the 2007 survey. However, among the companies with ESPPs, 8% reported that their ESPP was new within the prior three years. ESPPs are most common in the high-tech sector (72% of high-tech companies) and lowest in the manufacturing sector (29%).

The NASPP survey reported that 82% of the surveyed companies had tax-qualified ESPPs in 2011, an increase of five percentage points over the figure in 2007. While only 24% had nonqualified plans, this figure has risen from just 9% in 2004.

For Section 423 ESPPs, the most common length of offering period in the 2011 survey is, by far, six months (53%). The next most common length is three months, a distant second at 19%. Interestingly, the once more common 12-month offering period now occurs at only 11% of the surveyed companies, and a 24-month period is even scarcer (9%). These trends indicate some small effort to reduce the FAS 123(R) expense. For nonqualified ESPPs, the most common lengths of offering period are three months (31%) and six months (27%).

For more survey data showing ESPP trends, see the FAQ on the topic at myStockOptions.com. If you're not familiar with ESPPs, take a few minutes to hear our fun introductory podcast (The Basics of ESPPs). And if you think you know your ESPP stuff, try your hand at our interactive ESPP quiz

Got Eight Minutes? Get The Facts On The New IRS Forms & Reporting For Stock Sales

If there's a way to make learning about tax forms fun, we'll try it. In the Tax Center at myStockOptions.com, we just published an animated presentation on the expanded IRS Form 1099-B, the new IRS Form 8949, and the revised Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during the imminent tax season.

In a concise, engaging overview, our editor-in-chief Bruce Brumberg will inform you about:

• the expanded reporting on Form 1099-B, and why the reported cost basis may be wrong or omitted
• how to figure out the right cost basis for your stock sales
• the new Form 8949 and how to report stock sales on it
• how to interpret Form 1099-B when completing Form 8949
• what to do when the cost basis in Box 3 of Form 1099-B is too low or not given
• totaling the reported stock sales on the revised Schedule D

Need further information? There's plenty more where that came from. A new article and FAQ at myStockOptions.com give full coverage of these tax-return topics. Additionally, our special section Reporting Company Stock Sales presents FAQs with annotated diagrams of Form 8949 and Schedule D. Each FAQ explains and illustrates a different reporting situation involving stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, or stock appreciation rights. Clear instructions and diagrams show how to complete the forms, whether the cost-basis information on Form 1099-B is accurate, too low, or omitted.

Stock Comp Income & Withholding On Your Form W-2? Time For Our FAQs & Diagrams

Form W-2 is in the air—or, hopefully, safely in your mailbox or desk by now. If you had income from stock compensation or an employee stock purchase plan in 2011, you need to understand where that income is reported on the W-2 so that you can complete your tax return properly. In the award-winning Tax Center at myStockOptions.com, we have a series of FAQs dedicated to interpreting this sometimes cryptic document. These FAQs include annotated diagrams of Form W-2 that clearly show you around the form.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income appear in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Sell Shares In 2011? The Fun Ain't Over Yet

If you sold shares from stock compensation or an ESPP last year, you'll need more guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting.

Resources For Stock Plan Professionals

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns. The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).