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No Option Tax - For Now
03/01/01
By: Andrew Osterland, CFO
Companies plagued by the burden of collecting withholding taxes on employee stock purchase plans (ESPPs) and incentive stock options (ISOs) will find some relief in a recent two-year moratorium on such collections announced by the IRS.
The announcement is the latest reversal on a matter that has caused uncertainty for years. In the late 1960s, the IRS issued a revenue ruling indicating that employers were not required to impose withholding taxes on ESPPs and ISOs. However, during some audits in the mid-1990s, the agency argued that companies needed to collect the payroll taxes. The result, says John Scott, director of retirement policy at the Washington, D.C.-based American Benefits Council, has been "a lot of uncertainty."
The moratorium brings welcome relief to many companies, according to Paul Dorf, managing director of Compensation Resources Inc., an Upper Saddle River, New Jerseybased compensation consulting firm. Although employees are responsible for eventually paying a capital-gains tax when they sell upon appreciation of a stock, the onus, in many cases, has been on the company to collect those taxes. In the event that it was unable to collect, it had to pay the tax or be subject to a fine. "[The IRS is now] saying, 'Look, forget about it, guys. People are still responsible for the tax, but we're not going to hold the company responsible for it,'" says Dorf.
Melissa Cruz, CFO of Concord Communications Inc., a Marlboro, Massachusetts-based E-business performance management firm, adds that the move will "reduce the reporting requirements" involved in collecting withholding tax on ISOs.
The purpose of the unusually long moratorium is to give the IRS some time to decide on a course of action. Dorf, for one, believes the noncollection policy will become permanent, in order to encourage companies to use the plans. -- Lisa Yoon
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