California Payroll
Conference
Understanding Stock Administration
Related to PAYROLL
Suzie Bentley, CPP, NVIDIA Corp.
Christine Zwerling, CEP, Stock & Options
Solutions
September 11 and 12, 2014
Agenda
 Overview – Common equity awards and their life cycles
 Employee Stock Purchase Plans (ESPP)
 Stock Options
 Stock Appreciation Rights
 Restricted Stock
 Tips on streamlining processes
 Working together!
 Appendix of other interesting info…
A day in the life of payroll…
External
Service
Provider
Stock
Admin
IRS, State
and Local
Agencies
Human
Resources
Global /
Sub / Other
Payrolls
Tax Dept
Payroll
Employees
A day in the life of stock admin…
External
Service
Provider
Payroll –
U.S. &
Global
Finance –
A/P and
Reporting
Human
Resources
IRS, State
and Local
Agencies
Legal /
Compliance
Securities
Exchange
Commission
Tax Dept
Stock
Admin
Employees
ESPP – What is it?
 Purchase of Company Stock at a discount
 Each pay period, participants contribute a percentage of their pay
(calculated before tax, deducted after tax)
 At the end of the purchase period, contributions are used to purchase
company stock at a discount
 Definitions:






Grant Date / Offering Period Start Date / Purchase Period Start / Enrollment Date
Exercise Price, Strike Price, Grant Price, Purchase Price, FMV
Exercise / Purchase
Dispositions
Qualified / Disqualified
Section 423 ESPP / Non-423
 Example:
 First Day (enrollment date) January 1; FMV $10/share
 Last Day (purchase date) June 30; FMV $12/share
 Purchase Price $8.50
ESPP – Enrollment / Contributions
 Plan documents govern the program and define:
 What pay is eligible
 Which participants are eligible to participate
 How calculated
 Gross pay
 Deducted from net pay
 Contribution limits
 Excess contribution distribution - refunded or rolled forward
 Deadlines for enrollment, changes, withdrawals, refunds
ESPP – Changes
 Employment changes
 Termination – refund
 Ineligibility – refund
 Withdrawal – refund
 Contribution rate changes
 Process for managing changes
 All ESPP changes to be made through stock administrator
 Track # of changes (i.e., one decrease during period, etc.)
 Effective date for changes
 Contribution limits
 Flat dollar contribution limit?
 $25k limit
ESPP - Purchase
 Contribution file to Stock Admin (Timing is critical!)





Per pay period or Once at end of purchase period
Process for updating contributions before purchase - Adjustments
Multiple payroll groups sending contributions – global program
Currency conversion
No reporting or tax in U.S. at purchase! Yeah!
 Carry forwards
 Refunded
 Remain in the plan until the next purchase
 Who tracks this?
 What if a participant terminates participation in the plan?
 Example
 $1,000 contributions and $8.50 purchase price
 117 shares purchased and $5.50 remaining contributions (carry forward)
ESPP –Dispositions (Sales/Gifts)
 Reporting for 423 plans (qualified and disqualified)
 How often - monthly, quarterly, annually?
 Compensation income recognized on sale of shares in U.S.
 Statutory holding period not met
 recognize income equal to the spread in the stock when the shares
were purchased
 Statutory holding period met - recognize lesser of
 1) the discount offered under the plan as computed on the participant's
offering date, or
 2) the actual gain on the sale (Sale Price minus Purchase Price)
 Terminated employee sales
 ESPP sale income exempt from FICA/FUTA under the
American Jobs Creation Act of 2004
ESPP – W-2 Reporting
 Form W-2 reporting:
 Box 1 (Wages, tips, and other compensation)
 Box 16 (State wages, tips, etc.), if applicable
 Box 18 (Local wages, tips, etc.), if applicable
 Just for fun!
 Regulation §1.6041-2(a)(1) requires Form W-2 even
if those payments are not subject to withholding:
 Disqualified Disbursements (also receive Corporate Tax Credit)
 Qualified Disbursements

IRS Publication 15-B: Employer’s Tax Guide to Fringe
Benefits
2014 W-2
Options/SARs – What are they?
 Stock Option
 Contractual right to purchase shares of the company's stock
 A specified number
 A specified price (the exercise price) and
 A specified period of time(generally between five and 10 years)
 Value only if stock appreciates
 Non Qualified (NQ) or Qualified (ISO – Incentive Stock Option)
 Stock Appreciation Right (SAR)
 Only pays out the appreciation in the stock price
Options/SARs – What are they?
 Definitions
 Grant / Award
 Grant Date, Date Of Grant, Award Date
 Exercise Price, Strike Price, Option Price, Grant Price, Purchase Price,
FMV
 Vest
 Exercise / Purchase
 Cash
 Cashless / Same-Day Sale
 Disposition / Sale
 Qualified or Disqualified
 Section 421 ISO
Options/SARs – Vesting
 Payroll usually doesn’t have to do anything!
 UNLESS…
 Exercise of unvested
 Granted at a discount
 Look out for 409A!
Options/SARs – Exercise
 NQ (non qualified) or SAR
 Recognize compensation when purchase shares
 Market Value minus Exercise price
 Form W-2 reporting:






Box 1 (Wages, tips, and other compensation)
Box 3 (Social Security wages), if applicable
Box 5 (Medicare wages and tips).
Box 12, with code V
Box 16 (State wages, tips, etc.)
Box 18 (Local wages, tips, etc.)
NOTE: Taxes withheld should be aggregated with employees’ other withholdings for the
year and reported in Boxes 2, 4, 6, 17, and 19, as appropriate
2014 W-2 tax reporting
Stock Options – Exercise (ISOs)
 Nothing!
 UNLESS…
 Pennsylvania
 Then income and state income taxes due upon exercise
Stock Options – Disposition (ISOs)
 Subject to tax for regular tax purposes at sale
(disposition)
 Meet holding periods (qualified)
 No reporting or withholding obligations at sale
 Do not meet the required statutory holding periods
(disqualified)
 The compensation income recognized is equal to the lesser of:


1) the spread at exercise (difference between the market value of the stock
at that time and the exercise price, or
2) the actual gain realized on the sale (the difference between the sale price
and the exercise price)
Timely Tax Deposits
 IRS requires tax receivables in excess of $100,000 per day to
be deposited within one business day.
 All receipts combined from all sources
 Stock admin primary sources are stock option exercises and
restricted stock vestings
 Deposit date of T+1 for non broker stock option exercises
 Deposit date of T+4 for stock option transactions via broker
 Deposit date of V+1 for RSUs and RSAs
 Calendar “known” transactions
 Stock administration knows when RSU vest
 Immediate notification for stock option exercises
 Failsafe process to confirm/deny daily or periodic activity
Restricted Stock – What is it?
 Restricted Stock (RSA) / Restricted stock units (RSUs)
 Outright grant of company stock to employees or other service
providers
 Known as “Free Shares”
 No cost to grantee
 “Restricted"
 Subject to a vesting schedule
 Time Based or
 Performance goals
 May be governed by other limits on transfers or sales imposed by the company
Restricted Stock - Grant
 Payroll usually doesn’t have to do anything!
 UNLESS…
 IRC Section 83(b) election filed, then taxed immediately.
 Only available for RSA
Restricted Stock Unit- Vesting
 Compensation income reported at vest
 market value
 FIT / FICA / FUTA taxable at vest
 unless the RSU is subject to deferral
 Not reported in Box 12
 May voluntarily report income in Box 14 (Other)
Restricted Stock - Timely Tax Deposits
 IRS requires tax receivables in excess of $100,000 per day to be
deposited within one business day.
 All receipts combined from all sources
 Stock admin primary sources are stock option exercises and
restricted stock vestings
 Deposit date of T+1 for non broker stock option exercises
 Deposit date of T+4 for stock option transactions via broker
 Deposit date of V+1 for RSUs and RSAs
 Calendar “known” transactions
 Stock administration knows when RSU vest
 Immediate notification for stock option exercises
 Failsafe process to confirm/deny daily or periodic activity
Yeah, we’re done! Here you go…
But what happens if…
Streamlining Processes
 Same-day or close proximity transactions
 Example 1
This transaction will bring Social Security to
annual maximum ($6,510 previously withheld
+ $539.40 = $7,049.40)
Settlement to occur T+3
(2/25/13)
Payroll Deposit to occur T+4
(2/26/13)
Streamlining Processes
 Same-day or close proximity transactions
 Example 2
Social Security maxed
out in Transaction 1
Settlement to occur T+3
(2/25/13)
Payroll Deposit to occur T+4
(2/26/13)
Streamlining Processes
 Same-day or close proximity transactions
 Example 3
+
YTD income surpasses $200,000 (Medicare
threshold) and $1,000,000 (Supplemental Income
threshold); part of transaction to be taxed at 2.35%
Medicare rate and 39.6% Federal rate.
Medicare:
($66,699.50 taxed
at 1.45% and
$883,300.50 taxed
at 2.35%)
Federal:
($866,699.50
taxed at 25% and
$83,300.50 taxed
at 39.6%)
Streamlining Processes
 Payroll data entry needs to match stock system and employee
confirmations
 Example Data Entry Sequence
#1
Entered
First
#2
Entered
Next
#3
Entered
Last
Working Together
• Both need to understand:
• Who to tax
• employees vs. non-employees, jurisdictional requirements
• What tax rates to apply
• Income reporting and tax withholding triggers
• Timing of reporting transactions
• Solutions:
• Create a matrix of taxability of various transactions
• Multiple states/jurisdictions
• Employees (and former) only
Appendix
Sample Taxability Matrix:
U.S. RSU and NQSO
Sample Matrix: U.S. ESPP
Taxable Values
Prepare matrices to explain taxability and timing to Payroll
RSU Global Tax*
Shares
Withheld
Taxable
Compensation
Taxable
Compensation
Company will withhold shares
from vested portion of grant
to cover tax liability
Company will report taxable
compensation but will not
withhold any taxes
Company will report taxable
compensation and may
withhold taxes through payroll
* Handling of Global tax is subject to change based on local regulations and requirements. Any tax rates applied to RSU vested shares are
provided by Regional Finance groups based upon estimated values of compensation. Please direct your tax rate related questions to your
Regional Finance group who processes your Payroll.
** French RSU Sub-plan (“Q”) requires two year vesting period and no tax withholding. FY13 grants not under the sub-plan (“NQ”) will be
taxable at vest. [Non-Qualified grants issued in FY14 will be reviewed for taxation in FY15.
Terminated Employees
 Transactions by former employees are generally subject to the same withholding and
reporting requirements that apply to current employees.
 Under Regulation §31.3401(a)-1(a)(5) any payment for services constitutes wages regardless
of whether or not the employment relationship exists at the time the payment is made:
 “Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages
even though at the time paid the relationship of employer and employee no longer exists between the person in
whose employ the services were performed and the individual who performed them.
 Thus, excluding the exceptions described below, compensation income recognized by a former
employee should be reported on a Form W-2 and should be subject to withholding.
 W-2s need to be prepared for terminated employees and may need to be reactivated in
payroll system
 Address changes
 See if changes can be forced through company (e.g. broker doesn’t unilaterally change in their own system)
 Explore messaging ability on vendor sites to remind former employees to change their address
 Ideally advance communication about transactions for terminated employees
 Develop batch process for communicating post termination activity to Payroll
 Don’t wait until the very end of the year = during crunch time
Thank you for your attention
Suzie Bentley, CPP
Christine Zwerling, CEP
Director, Stock Admin & 401(k)
Senior Equity Compensation Consultant
NVIDIA Corp.
sbentley@nvidia.com
Stock & Option Solutions, Inc.
czwerling@sos-team.com
408.566.6591 Tel
510.735.4487 Tel
The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all
aspects of the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to
be relied upon, and should not be considered, as legal, tax, or accounting advice.Your specific situation may involve circumstances that cause the laws,
rules, regulations, standards and principles described herein to apply differently. Consult your own advisors before deciding what, if any, course of action
to take in your own particular situation.