Tax Facts

7550 / Does the exercise of a stock option generate “wages” for FICA and FUTA tax purposes?

The term “wages” excludes remuneration received on account of the following: (1) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option; or (2) any disposition by the individual of such stock. The exclusion applies to stock acquired pursuant to options exercised after October 22, 2004.1

Proposed regulations had provided that an individual exercising an incentive stock option would receive wages for FICA and FUTA purposes. However, in 2002, the IRS announced that until further guidance was issued, the Service would not assess the FICA or FUTA tax, or apply federal income tax withholding obligations, upon the exercise of the option or upon the disposition of the stock acquired by an employee pursuant to the exercise of an option.2 In AJCA 2004, Congress codified the exclusionary rule, above.

1. IRC § 3121(a)(22); Act § 251(d), AJCA 2004.

2. REG-142686-01, 66 Fed. Reg. 57023 (11-14-2001); Notice 2002-47, 2002-2 CB 97. See also Notice 2001-72, 2001-2 CB 548, Notice 2001-73, 2001-2 CB 549.

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