How should I be paying the taxes on my same-day sale of incentive stock options?

May 10, 1999

Subject:   Same Day Sale ISO
Date:   Sat, 8 May 1999
From:   Reese

I did a same-day sale of incentive stock options in April, 1999. No taxes were withheld. However, I received a form from my employer showing me the computation of taxes that should be owing to the state and federal governments based on this transaction. My question is whether I need to file a special tax form and pay this now in the second quarter of 1999, pay the money to my employer now or just pay the taxes on April 15, 2000. Your advice will be appreciated.

Best regards,



Date:   Mon, 10 May 1999

Hello Reese,

Thanks for writing.

Your employer really should have withheld income taxes for your disqualifying disposition.

I don’t know how reliable the tax amounts are that you received from your employer. These amounts should be computed based on your individual facts and circumstances.

There are estimated tax forms for the prepayment of taxes. The Federal form is Form 1040-ES.

For Federal tax purposes for 1999, as long as you have evenly prepaid at least 105% of your 1998 tax, there shouldn’t be any penalty for underpayment of estimated tax. You might have a tax benefit for prepaying your state tax by the end of the year.

As an alternative to filing estimated tax forms, consider having your withholding increased. Withholding has an advantage because it is considered received evenly through the year regardless of when it is paid in. Estimated tax payments are applied as they are actually received by the tax authorities.

Good luck!

Mike Gray

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

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