Do employers withhold taxes for NQSOs for

July 20, 2001

Subject:   Employer Taxability – Non Qual Stock Options
Date:   Mon, 15 Jan 2001
From:   Cathy

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

Hello Cathy,

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.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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