Remember to Report Incentive Stock Option Exercises and Stock Purchases

Remember to Report Incentive Stock Option Exercises and Stock Purchases

By: John D. Walch, Shareholder – Durham Jones & Pinegar


The IRS requires employer corporations to provide written statements by January 31 to their employees regarding transfers of stock pursuant to an incentive option (ISO) exercise or shares purchased under an Employee Stock Purchase Plan (ESPP).  The corporation must also file the statements with the IRS by March 31 (or February 28, if done manually with paper copies).  The IRS created Form 3921 to accomplish both reporting obligations.  The corporation files Copy A with the IRS, gives Copy B to the employee and the keeps Copy C.  Although the corporation can file Form 8809 to extend its IRS reporting deadline for 30 days, no extension is available for the delivery of the form to the employee.

Similarly, the corporation uses IRA Form 3922 to report stock purchases under an ESPP.  Like the reporting for options, if the corporation has at least 250 statements to file, it must submit them electronically; the IRS does not allow manual filing.  The corporation must deliver the form to the employee in person or mail it to the employee’s last known address.  If the employee has so consented, the corporation may deliver them electronically.

Failure to timely satisfy these filing requirements may result in the IRS assessing penalties on a per-form basis of $50 – $250.  The penalty amount will vary based on the corporation’s size and how late it was in filing the forms.  Separate penalties (in the same amounts) apply for the late delivery of the forms to the employees.  If the corporation is required to file electronically and does not, that is also a penalty of up to $250 per form.  If the IRS determines that the late filing or delivery is due to intentional disregard of the reporting requirements, the penalties substantially increase.

These reporting obligations are in addition to those that apply to disqualifying dispositions of an ISO or ESPP stock.  Generally, the employer must report disqualifying dispositions on a W-2 as “other compensation.”  Failure to do that may prevent the employer from deducting the amount of income recognized.

Finally, employers should remember that the exercise of non-qualified options is also included on an employee’s W-2 (or a 1099 for non-employees like board members) and is subject to income tax withholding for employees.  Employers report these reportable amounts of income in Box 12 using code V.

With more than 25-years of experience, Mr. Walch is an Employee Benefits attorney at Durham Jones & Pinegar. He works with employers to design, prepare and resolve issues relating to a broad range of qualified and non-qualified benefit plans, including equity-based incentive compensation plans, ESOPs, non-qualified deferred compensation plans, qualified retirement plans and welfare benefit plans, including health, cafeteria and flexible spending plans. For more information visit DJPLAW.COM or contact John D. Walch at (801) 415-3000, or [email protected].