Tax Facts

3617 / What are the reporting and withholding requirements that apply with respect to ISOs?

The employer has no obligation to pay FICA or FUTA taxes, or to withhold federal income taxes, when an option is granted. Pending further guidance from the IRS, employers also are not obligated to pay or withhold FICA and FUTA taxes on the exercise of ISOs.1 However, the IRS has announced that any sponsor determination to impose FICA or FUTA on the exercise of ISOs will not take effect before January 1 following the second anniversary of the announcement.

IRC Section 6039 requires employers to provide a written statement to each employee regarding any exercise of an ISO and, beginning for transfers occurring in 2009 or later, to file a similar information return with the IRS by January 31 of the year following the transfer.2 Under proposed regulations, the information return must identify the parties and provide the following information:

The date the option was granted

The exercise price per share

The date the option was exercised

The fair market value of a share on the date of exercise

The number of shares transferred pursuant to the exercise

1. Notice 2002-47, 2002-28 IRB 97.

2. Prop. Treas. Reg. §§ 1.6039-1, 1.6039-2.

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