Tax on Stock Options May be Coming

Internal Revenue contemplating 15.3 percent tax on employee stock options; tech executives contemplating a high ledge.

Leave us our options.

That was the resounding message sent to the IRS during a public hearing Tuesday on a proposal to levy the same Social Security, Medicare, and unemployment taxes on options that are taken out of regular paychecks.

If passed, the proposal would result in a 15.3 percent tax on exercised options, as well as employee stock-purchase plans. Under the IRS scheme, employees and employers would split the cost.

“The proposed regulation .. would present employers with severe administrative difficulties,” said Gregory Sikon, a vice president for global tax planning with Ciena Corp., who testified on behalf of the American Electronics Association. “Indeed, under some circumstances, it would be impossible to comply with the withholding and remitting requirements.”

A tax on employee stock options (ESOs) would affect a sizable chunk of the working population. According to the National Center for Employee Ownership, 8 million to 10 million employees receive stock options these days. In addition, nearly 16 million employees can buy shares at a discount under their companies’ stock-purchase plans.

Technology companies would likely take the biggest hit from a tax on stock options. Some 97 of the top 100 ecommerce companies provide stock options to most or all workers, according to the National Center for Employee Ownership.

The tax would also impose a bigger burden on lower-paid employees. Why? Because the cap on annual Social Security contributions is currently $84,900.

It might also have some corporates thinking about limiting their stock option plans. Bill Blaylock, a vice president and tax director with Texas Instruments Inc., reportedly testified that the proposed tax would put undue compliance burdens on businesses. “Because of the additional cost and complexities of compliance, and because of the prospect of filing claims, soliciting employee consents and restating payroll filings, some employers may decide not to offer these important programs to their employees,” said Blaylock, testifying on behalf of the National Association of Manufacturers.

If the IRS implements its proposal, businesses will be required to begin paying the tax in January 2003. Happy New Year.

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