Tax Calculations for Exercises and Releases
For vested stock options exercises, depending upon the option type, ordinary income or alternative minimum tax (AMT) income is calculated at the time of the exercise. When an option is exercised prior to vesting the income calculation generally occurs when shares are released, free of restrictions. However, an optionee may choose to file an 83(b) election to accelerate the time at which the applicable ordinary income or Tax Preference Income for AMT is recognized.
When you calculate ordinary income Stock Administration enables you to calculate taxes by integrating with PeopleSoft Payroll for North America, using Load Default taxes or by manually entering taxes into the system for the exercise. The tax page is not available when Tax Preference Income for AMT is calculated or when ordinary income is zero. Stock Administration does not support the calculation and collection of taxes based upon Tax Preference Income for AMT pursuant to the IRS guidelines under circular E. Consult your payroll administrator or tax advisor for further information.
Tax Preference Income for AMT is calculated at exercise or release (if a restricted exercise) for ISOs and ISO/SARs exercised for shares. Ordinary income is calculated at exercise or release (if a restricted exercise) for NQs, RSAs, NQ/SARs, and ISO/SARs exercised for cash (SAR exercise). ISOs exercised after the regulatory period for termination and disability are treated as NQs and therefore ordinary income is calculated.
Stock Administration supports these exercise and release methods: cash, loan, swap, same day sale, and sell to cover, along with trade for taxes. The different share and tax payment methods affect how the system calculates the ordinary income. If an exercise method involves a sale, such as same day sale or sell to cover the system must first look to the Stock Option Plan rules for sale income methods. The methods available for each option type are FMV; sales price; or lesser of FMV or sales price. The method chosen for the option type determines what price is used when calculating the ordinary income. If only some of the shares are sold the sale income method is used only to calculate the ordinary income for the shares sold. The remaining shares (exercised but not sold) use the FMV to calculate the remaining ordinary income.
Note:
Stock Administration supports only IRS tax regulations, consequently the tax calculations and discussions are based on the IRS tax code.
The following tables compare different income calculations for the various exercise and release methods.
Calculating Tax Preference Income for AMT at Exercise
| Share and Tax Payment Method | Calculation |
|---|---|
|
Independent of whether shares are sold at the time of the exercise (Cash, Loan, Pay Deduction, Swap, Trade, Same Day Sale, Sell To Cover) |
Tax Preference Income for AMT = Exercise Value − Cost of Shares Where: Exercise Value = Exercise FMV x Shares Exercised Cost of Shares = Grant Price x Shares Exercised |
Calculating Ordinary Income at Exercise
| Share and Tax Payment Method | Calculation |
|---|---|
|
No Sale Involved (Cash, Loan, Pay Deduction, Swap, Trade) |
Ordinary Income = Exercise Value − Cost of Shares Where: Exercise Value = Exercise FMV x Shares Exercised Cost of Shares = Grant Price x Shares Exercised |
|
Sale Involved (Same Day Sale or Sell to Cover) |
Ordinary Income = Exercise Value − Cost of Shares Where: Exercise Value = (Income Method Rule x Shares Sold) + (Exercise FMV x (Shares Exercised − Shares Sold)) Cost of Shares = Grant Price x Shares Exercised Income Method Rule = FMV, Sale Price or Lower of FMV or Sale Price |
Calculating Tax Preference Income for AMT at Release
AMT is calculated at Release if unvested shares are exercised and an Election 83(b) was not filed.
| Share and Tax Payment Method | Calculation |
|---|---|
|
Independent of whether shares are sold at the time of the release (Cash, Loan, Pay Deduction, Trade, Same Day Sale, Sell To Cover) |
Tax Preference Income for AMT = Release Value − Cost of Shares Where: Release Value = Release FMV x Shares Released Cost of Shares = Grant Price x Shares Released |
Calculating Ordinary Income at Release
| Share and Tax Payment Method | Calculation |
|---|---|
|
No Sale Involved (Cash, Loan, Pay Deduction, Trade) |
Ordinary Income = Release Value − Cost of Shares Where: Release Value = Release FMV x Shares Released Cost of Shares = Grant Price x Shares Released |
|
Sale Involved (Same Day Sale or Sell to Cover) |
Ordinary Income = Release Value − Cost of Shares Where: Release Value = (Income Method Rule x Shares Sold) + (Release FMV x (Shares Released − Shares Sold)) Cost of Shares = Grant Price x Shares Released Income Method Rule = FMV, Sale Price or Lower of FMV or Sale Price (FMV used determined by 83(b) filing) |
When ordinary income is recognized at exercise or release you calculate and collect the withholding taxes for US employees. You need to define the stock tax types, percentages, and limits to enable the Load Default Tax process to calculate the appropriate withholding. When you set up the various Stock Tax Types you need to define the Country Code associated with the tax you are setting up. This enables you to set up the various taxes associated with different countries. When you click the Load Default Tax the system calculates taxes based on what is set up in the tables for the country and state code at the locality for the individual. If you use Payroll for North America you can use the Calculate Tax and Update Payroll functionality to calculate the withholding due at the exercise or the release. You need to set up stock tax types for integration with Payroll for North America in order to correlate tax class to tax type.
Payroll Integration Issues
If you use Payroll for North America you can take advantage of integrated processes to calculate taxes and send tax and ordinary income directly to payroll. Otherwise, you can generate the Options Income and Tax report to send to your payroll administrator.