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Claim Your Free Copy of Overtime Primer: Highlights from the New Regulations

The federal DOL overtime regulations go into effect this year. Are you ready?


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This report includes a summary of key changes, including the salary level test and salary basis test.

As a bonus, we've included a handy flowchart to help you determine exemption status under the FLSA.

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November 26, 2001
Incentive Stock Options Subject to Payroll Tax
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panies and employees must pay the 15.3 percent payroll tax on the exercise of incentive stock options and proceeds from employee stock purchase plans, under new regulations issued by the Internal Revenue Service.

The Bloomberg News Service reports that while the proposed rules exempt companies from withholding income taxes on such transactions, the burden of collecting payroll taxes from current and former employees may force some employers to drop their stock option programs.

"It diminishes benefits to employees" who will pay higher taxes, said Mark Nebergall, president of the Software Finance and Tax Executives Council, a trade group that represents companies such as Microsoft Corp. and Oracle Corp.

"Some companies may nix their plans" rather than face the compliance burdens, Nebergall told Bloomberg.

It is the first time in 30 years payroll taxes will be assessed on incentive stock options and employee stock purchase plans, according to Bloomberg. The payroll tax consists of a 12.4 percent tax used to fund Social Security and a 2.9 percent tax used to fund Medicare, with both portions split evenly between employer and employee.

The Social Security tax is imposed on the first $84,900 of salary next year; there is no cap on the Medicare tax.

Incentive stock options and employee stock purchase plans have tax incentives built in that encourage owners to hold the stock for at least a year. They differ from ordinary employee stock options, which are usually exercised and sold on the same day and are taxed as ordinary income at rates of up to 38.6 percent no matter when they are sold. Companies get a tax deduction and must track when their employees exercise these ordinary options.

The payroll tax would apply on the difference between the exercise price of an incentive stock option and the fair market value.

For employee stock purchase plans, the payroll tax would be applied to the 15 percent discount employees are given when they purchase the stock.

The new regulations are prospective, meaning companies that violated the rules in the past face no sanctions.

Current and former employees would still be liable for any income taxes owed in addition to their share of Social Security and Medicare taxes.

To view the Bloomberg News Service article, click here.


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