How to Report Equity Plan Transactions on Forms W-2 and 1099

Tax season is upon us, and that means questions about how to report equity plan transactions on tax forms. In this blog entry, I cover the basics and highlight additional resources for more in-depth questions.

Form W-2 Fundamentals

What is included in employees’ forms W-2 in connection with equity plan transactions?

When employees recognize compensation income in connection with their equity awards, this income is reportable on Form W-2 in box 1 (wages, tips, and other compensation).

If the income is subject to Social Security tax, it is reported in box 3 (Social Security wages). And if the income is subject to Medicare tax, it is reported in box 5 (Medicare wages and tips).

The income associated with equity award transactions is aggregated with the employee’s other wages in Boxes 1, 3, and 5.  Although not required, many companies also report income recognized for equity plan transactions separately in Box 14 (Other), so that employees understand how much of the income reported in Box 1 was attributable to their awards.

If the income is subject to state or local income tax, it should also be reported in box 16 (state wages, tips, etc.) and box 18 (local wages, tips, etc.).

Any taxes withheld on the income should be aggregated with employees’ other withholdings for the year and reported in Boxes 2, 4, 6, 17, and 19, as appropriate.

Are there any other boxes to worry about on Form W-2?

Yes, in some cases the income may be reportable in box 11 or box 12.

• If the income is attributable to a deferred payout of an RSU award, or payout of an RSU award on or after retirement, the income may be reportable in box 11. See the article “Deferred Stock Units” for more information.
• If the transaction is an NQSO exercise, the income must be reported in box 12 with code V.
• If the compensation income is the result of a Section 409A violation, the income must be reported in box 12 with code Z.

For a quick tour of Form W-2, check out my video "How Equity Awards Are Included in Form W-2."

Transactions by Nonemployees

What about transactions by consultants and outside directors? How is that reported?

Compensation income recognized by consultants and outside directors in connection with equity awards is reported on Form 1099-NEC in box 1 (nonemployee compensation). The income is aggregated with any other payments made to the nonemployee during the year.

Transactions by Former Employees

How should employers report income recognized by former employees as a result of equity plan transactions?

Transactions by former employees are generally subject to the same withholding and reporting requirements that apply to current employees. Thus, excluding a situation involving the death of an employee or a change to consultant status, compensation income recognized by a former employee in connection with equity plan transactions should be reported on a Form W-2 (and is subject to withholding if the income results from a nonqualified arrangement).

What if the former employee is providing services as a consultant? Can employers report the income on a Form 1099-NEC?

It’s complicated, but it’s likely that at least a portion, if not all, of the income is reportable on Form W-2. See the blog entry “ Taxation When Employment Status Has Changed.”

Transactions After an Employee’s Death

How should employers report income recognized for transactions that are paid out on or after death of an employee?

Transactions that occur on or after an employee’s death are not subject to federal income tax withholding. The income recognized for FIT purposes should be reported on a Form 1099-MISC (not Form 1099-NEC) issued to the employee’s beneficiary/estate. The income is reported in box 3 (other income) of Form 1099-MISC.

The treatment for FICA (Social Security and Medicare) purposes depends on whether the transaction occurs in the calendar year of the employee’s death. If yes, the transaction is generally subject to FICA (Social Security and Medicare) taxation. Any income and withholding for FICA purposes is reported on the deceased employee’s final Form W-2.

If the transaction occurs in a calendar year that is subsequent to the employee’s death, it is exempt from FICA taxation.

Dividends Paid on Awards

How should employers report dividends and equivalents paid on equity awards?

In most cases, dividends and equivalents paid on equity awards are treated as compensation income and reported on Form W-2, in boxes 1, 3 (if applicable), 5, 16 (if applicable) and 18 (if applicable). (Dividends paid on restricted stock that is subject to a Section 83(b) election are an exception—these dividends are reported on Form 1099-DIV.)

FAQs on Tax Reporting

You probably have a bunch more questions and we have lots of answers. In fact, we have three FAQs on forms W-2 and 1099 that provide more detailed information on reporting transactions for each type of equity vehicle:

• Restricted stock and units
• Stock options
• ESPPs

Tax Reporting Guides

One of my favorite resources is our “Tax Reporting Guide for Stock Plan Transactions,” which features a series of tables that illustrate how to report various equity plan transactions on Form W-2, including which boxes the transaction income should be included in.

The article “ US Tax Reporting for Stock Compensation” provides an in-depth compendium of companies’ US tax withholding and reporting obligations for equity compensation, complete with sample forms. If you have a question about tax reporting, this resource probably answers it.

A Checklist for Form W-2

Because tax reporting rolls around only once a year and each report covers a full year of transactions, it can be easy to overlook unusual transactions that aren’t top-of-mind. Our “Form W-2 Reporting Checklist” is a great tool to go over with your payroll team, to verify that they haven’t missed any transactions that should be reported on Form W-2.

Tax Reporting Videos

Don’t like to read? we’ve got you covered with several videos. If you missed it, be sure to check out our webinar, “2023 Tax Reporting Best Practices for Equity Awards.” For those of you with shorter attention spans, the following videos (less than ten minutes each) might be just what you are looking for:

• How Equity Awards Are Included in Form W-2: This video provides quick tour of the boxes in Form W-2 where income from equity plan transactions is reported.
• Tax Reporting for RSUs that Provide for Accelerated or Continued Vesting Upon Retirement: This video explains the company's tax withholding and reporting obligations for RSUs that provide payouts to retirees.
• Tax Reporting for Options and Awards Transferred Pursuant to Divorce: This video explains the company's tax reporting and withholding obligations when options and awards are transferred pursuant to divorce.
• Tax Reporting for Options and Awards Transferred Upon Death: This video explains the company's tax withholding and reporting obligations for equity arrangements that are transferred upon death of an employee.