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Date:   Fri, 09 Dec 2005
From:   Linda

What taxes are required to be withheld for an individual who exercises a non-qualified stock option who is not a company employee? This individual is a member of our board of directors and is not a resident of California.

Please advise. Thanks.

Answer

Date:   Fri, 09 Dec 2005

Hello Linda,

Since the individual is not an employee, his or her income is not subject to withholding taxes or employment taxes that apply to employees.

California requires 7% income tax withholding for non-employee earned compensation paid to an individual who is not a resident of California. See FTB Publication 1023 and FTB Forms 587, 590, 592, 592-A, and 592-B. The web site for the Franchise Tax Board is www.ftb.ca.gov. Shouldn't you be talking to your tax return preparer about this?

Good luck!

Mike Gray

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

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.