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Date:   Tue, 22 Jul 2008
From:   John

When are the withholding taxes paid on NQSO?

Scenario:

Employee A leaves Company X and has 1.25 shares vested of NQSO. Company X is in the process of being sold. If Employee A exercises the option, does the employee have to pay the taxes immediately on the excess of the fair market value over the option price of the stock, or can the company withhold the tax when the sale is consummated or issue a 1099?

Answer

Date:   Wed, 06 Aug 2008

Hello John,

The withholding is due at the time of exercise.

An exercise of an NQO issued during the employment of a former employee should also be reported on Form W-2. It is subject to withholding and employment taxes. The ordinary income from these transactions should not be reported on Form 1099.

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.