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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?

Answer

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, 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.