Tax Withholding Trends for Equity Awards

Tax withholding is one of the top administrative challenges many companies face with respect to their equity plans. Determining tax withholding rates can be complicated, especially globally, and, in the United States, the deposit deadline is often very tight.

The 2022 Equity Administration Survey, cosponsored by the NASPP and Deloitte Tax, reports on how companies manage these and other tax-related challenges. In a recent podcast, I sat down with Caroline Durbin of Deloitte Tax to discuss the survey findings. Here is a summary of our conversation.

Requests for Additional Withholding

A question that comes up frequently in the NASPP discussion forum is whether companies can accommodate requests from employees for additional withholding on their stock plan transactions. As noted in the NASPP Blog entry “What You Need to Know About Excess Tax Withholding,” the IRS issued an information letter in 2012, indicating that employees should request additional withholding by submitting an updated Form W-4. The company would then have to withhold at the employee's W-4 rate to honor the request.

Over 60% of respondents to the 2022 survey indicate that they don't accommodate requests for additional withholding on stock plan transactions. Among those that do accommodate these requests, most do so only for certain individuals, such as executives or only on an exception basis.

I asked Caroline for her thoughts on considerations and risks related to accommodating requests for additional tax withholding. She notes that the decision involves weighing the administrative burden of accommodating the request against the participant experience. She also warns that it is important to be cognizant of the precedent you set by accommodating the request. If you allow an employee to request additional tax withholding once, it’s likely they will expect that future requests will also be accommodated. They may even talk about their experience, creating an expectation among other employees that these requests will be accommodated.

As far as the risks go, Caroline explains that there aren’t really any tangible risks to the company for overwithholding. She cautions, however, that if companies allow employees to select an arbitrary rate, they could be at risk of underwithholding, which could create some payroll exposure for the company:

It's a bit of a fine line. Either you withhold at the supplemental rates or the W-4 rate. If you are trying to get cute and allow employees to, say, pick a rate, that can get a little bit dicey because you could set yourself up for underwithholding.

One solution to this concern is to restrict employees to choosing either the flat rate that applies to supplemental payments or the maximum individual tax rate but not permitting employees to choose any other rate.

Using the Prior Day Closing Price to Calculate Tax Withholding

Companies can ease some of the pressure around tax deposits for RSUs by using the prior day's closing value as their fair market value when determining employees’ taxable income for vesting events. This essentially gives companies a 24-hour head start on the tax calculations. In the 2022 survey, 19% of companies indicate that they define their fair market value for tax purposes as the prior day close, which is up from 13% in 2020.

 I asked Caroline if the survey results align with her experience:

I think the survey is spot on: there's a slight increase. We haven't seen it across the board, but we have seen it done in pockets, certainly.

Caroline finds that having an extra day to perform the tax calculations can give companies the breathing room they need to make sure their award transactions settle on time. For companies that are struggling with timely tax deposits for their RSU awards, she says it’s certainly worth exploring.

Determining Tax Withholding Rates for Non-HQ Employees

Because the United States is unique in offering a flat withholding rate that can be applied to supplemental payments, determining local tax withholding rates can be a real challenge for companies that offer equity outside their headquarter country. In many countries, equity award transactions are subject to withholding at the same rate that applies to an employee’s other wages; these rates can vary by employee (and, of course, by country).

The most common approach for equity transactions is to withhold taxes at a country’s maximum individual tax rate, but this represents only 38% of survey respondents. Just over 30% rely on their local payroll teams to provide appropriate tax rates, 30% use statutory or supplemental rates, and another 30% use a flat rate that is lower than the maximum individual rate. All those percentages add up to more than 100%, which means some respondents are using more than one approach.

With so much variation in practice, I asked Caroline if she has a favorite among these approaches. Her recommendation is to withhold at the top marginal rate in each country. She notes that, particularly for companies with large participant populations, trying to obtain individualized rates can be time consuming, causing settlement delays. Using the top marginal tax rate in each country means the company only has to worry about one tax rate per country, making the tax calculations considerably more straightforward.

Caroline notes, however, that when companies use this approach, any excess withholding is typically refunded through payroll. In many countries, taxpayers are not required to file an annual tax return and the local tax authorities view the taxes withheld through payroll as final (unlike in the United States, where payroll withholding is merely an estimate of an employee’s tax obligation). Thus, for employees who are subject to tax at the top marginal rate, refunding the excess withholding through payroll may be the only means by which these amounts can be returned to employees.

Learn More

This is just a small sampling of the many topics Caroline and I touched on during the podcast. Caroline also offered tips for ensuring that US tax deposits are timely, staying on top of global developments affecting equity plans, and collaborating with local payroll teams. Check out the full podcast today!