Print This Page

Subject:   Tax withholding on ISO's
Date:   Wed, 16 Feb 2000
From:   Russ

In the event that my employer (NYSE listed company) is acquired, resulting in immediate 100% vesting of my incentive stock options as of the closing date of the acquisition- and cash is received for these options (excess of purchase price over option exercise price)- what tax, if any, is my employer required to withhold? Obviously I would prefer zero withholding and payment of tax in April, 2001 so long as I avoid underpayment penalty.

Thank you.

Answer

Hello Russ,

This is a controversial issue.

Most employers have been treating this as a "withholding optional" event.

However, the IRS has recently indicated that employers should be withholding for the ordinary income from Incentive Stock Options and Employee Stock Purchase Plans like they do from NQO exercises.

However, the IRS indicated in Treasury Notice 2001-14 that no penalties will be imposed when an employer does not withhold taxes for ISOs or ESPPs exercised before January 1, 2003.

Be sure you have adequate withholding and estimated tax payments to avoid the penalty for underpayment of estimated tax.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.