American Payroll Association Applauds Treasury, IRS Decision Stock Plan Tax Moratorium Relieves Payroll Pros.

Business Editors

The payroll profession heaved a collective sigh of relief Tuesday when the U.S. Treasury and the Internal Revenue Service decided to indefinitely extend the moratorium on the imposition of FICA and FUTA taxation on qualified stock options, including incentive stock options and employee stock purchase plans.

The American Payroll Association, representing more than 20,000 payroll professionals from 15,000 employers, including major payroll service bureaus who process payrolls for nearly one million additional employers, had vigorously campaigned for the decision, submitting written comments on the proposed rules in March and testifying at the May Treasury hearing. APA members are tasked with the responsibility of ensuring proper withholding, the preparation and filing of accurate tax returns and information returns, and the calculation and deposit of federal, state, and local taxes.

The proposed rules would have imposed FICA and FUTA taxes on the difference between the option exercise price (the value at which an employee is allowed to buy the stock) and the fair market value of the stock at the time of purchase, effective Jan. 1, 2003.

"This will relieve employers of what would have been the enormous administrative burden of calculating the benefit, reporting the wages, and withholding the taxes. This would have been especially difficult in the case of former employees, who have no wages from which to withhold the tax," explained Scott Mezistrano, CPP, APA Manager of Government Relations.

"More importantly, this will allow qualified stock option plans to continue as intended, enhancing morale as employees benefit from productivity to which they contribute. This provides an important savings benefit, while spurring the growth of companies. It contributes to economic growth in both ways."

IRS Notice 2002-47, issued June 25, states that the IRS will not assess FICA, FUTA, or federal income tax withholding "upon either the exercise of the option or the disposition of the stock acquired by an employee pursuant to the exercise of the option" under a qualified plan. So, there are no withholding requirements on qualified stock options whatsoever, and the only payroll reporting requirement is that a disqualifying disposition (sale by the employee of the stock before the end of the requisite holding period) must be reported on Form W-2 in box 1.

The Notice also indicates that should the proposed regulations ever be finalized and require this taxation, the effective date of the requirement would be January 1 of the year that follows the second anniversary of the publication of the final regulations.