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Date:   3 Apr 2009
From:   Cathy

We issued NQSOs to a consultant who later became an employee and now is exercising the options. Since he's now an employee, is the company required to withhold income taxes?

Answer

Date:   6 May 2009

Hello Cathy,

Since the options were issued for services performed as a consultant, payroll tax withholding shouldn't apply. The income should be reported to this person using Form 1099-Misc.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified 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.