Do employers withhold taxes for NQSOs for
July 20, 2001
Subject: Employer Taxability – Non Qual Stock Options
Date: Mon, 15 Jan 2001
If an employer grants non-qualified stock options to a non-employee, does the employer have to withhold taxes at the time of exercise? If so, are they required to withhold payroll related taxes as well as income taxes?
Date: 9 Feb 2001
Generally, withholding is only required for employees.
Revenue Ruling 67-257, says withholding applies for employees.
The company should issue a 1099 form to the person who is required to report the ordinary income. (See Treasury Regulations Section 1.83-6(a)(2) and Internal Revenue Code Section 6041.) Then the company will be entitled to a tax deduction for the ordinary income reported by the service provider.
Occasionally withholding can be required for non-employees if there is a back-up withholding requirement or the employee is a non-resident subject to tax on income in another state.
I hope this helps.