7548 / What notice, reporting and withholding requirements apply to an employer that transfers to its employees stock options or restricted stock units where gain deferral is possible under IRC Section 83(i)?

The notice must:

(1) certify that the stock is qualified stock,

(2) notify the employee that he or she may elect to defer income recognition with respect to the stock,

(3) notify the employee that at the end of the income deferral period, the value of the stock to be recognized will be based on the value of the stock when the employee’s rights first become substantially vested, even if the value has subsequently declined, and

(4) notify the employee that the value as recognized will be subject to withholding at the end of the deferral period).¹

Failure to satisfy the notice requirements will subject the company to a penalty of $100 per failure, with a $50,000 annual maximum.

On Form W-2, the employer must report the amount of income covered by the deferral election both in the year of deferral and in the year that the income is required to be included in income by the employee. Further, the employer must report the total amount of income deferred through income deferral elections for the calendar year on Form W-2 each year (as determined at year-end). The rate of withholding on deferral stock will be the maximum rate of withholding under IRC Section 1 (currently 37 percent), and that deferral stock will essentially be treated as wages for withholding purposes.² Withholding will be applied:

(1) without reference to the payment of regular wages,

(2) without allowance for the number of allowances or other dollar amounts claimed on the employee’s Form W-4,

(3) without regard to whether the employee requests additional withholding, and

(4) without regard to the withholding method used by the employer.³

According to Notice 2018-97, income tax withholding wages are treated as paid with respect to Section 83(i) deferral stock on the date that the stock becomes taxable under Section 83(i). On that date, the employer must make a reasonable estimate of the taxable value of the deferral stock and make timely deposits of income withholding taxes based upon that value. The actual taxable value of the deferral stock must be reported on the employee’s Form W-2, which is due January 31 of the following year. The employer has up until April 1 of the following year to recover from the employee any income withholding taxes paid by the employer.