Are taxes withheld and reported on W2 for employee stock options?

Question

When exercising employee stock options, are taxes automatically withheld by the employer and reported on the w-2 so therefore no 1099-B needs to be filled out. It looks like I overreported withholding in 2005 according to the IRS and it appears because I doubled up the withholding for the stock exercise.

Thanks

Answer 1

Stock options don't go on Form W-2. If you exercise an option and then sell the stock, a 1099 will be cut showing the proceeds. It's up to you to keep track of the profit and file Schedule D to work out the taxes.

If you are given a negotiable option -- one that can be sold on the open market -- THAT would go on your W-2 as ordinary compensation. When you exercised the option it would be handled as any other option. That type of option is very rare indeed.

Special rules apply for restricted stock options. If you've been granted this type of option, consult with a tax pro.

Answer 2

There are two transactions when receiving stock options.

1. When you purchase company's stock using stock options, the difference between the option price and the FMV on the exercise date is considered compensation and included on the W-2. It is subject to Federal, State and FICA withholding.

2. When the stock is sold, the gain/loss on the sale has to be reported on Sch D. Your basis would be the FMV on the date of purchase.

These transactions would occur on the same date if you exercised a cashless options (where you received cash for the options.) Your W-2 would show a code "V" in box 12. If you don't report this on Sch D, the IRS will contact you saying you didn't report the sale. They and you will both receive a 1099B.