Single employees earning more than $200,000 and joint filers earning more than $250,000 will pay an additional 0.9% in Medicare taxes, for a total tax rate of 2.35%, beginning next year.
Reminders: Employers don’t match the additional 0.9%, and all employees must be treated as single for purposes of this additional tax.
To avoid the additional tax, employees may take some extraordinary steps regarding their noncash compensation before the end of this month. That means additional payroll headaches for you, right when you don’t need them.
Section 83(b) elections. Employees granted company stock that’s subject to a substantial risk of forfeiture aren’t taxable until the stock vests. However, they can accelerate payroll taxes, and come in under the new Medicare tax wire, by making Section 83(b) elections within 30 days of receiving their stock. The IRS recently released a model form employees can use for making 83(b) elections. Access the model here (scroll down to page 9).
Taxing NSOs. Employees who exercise nonstatutory stock options (NSOs) to buy company stock are fully taxable on the spread—the difference between the market value of the stock and the price employees paid when they exercised their NSOs.
ISO stock dispositions. Incentive stock options (ISOs) are options to buy company stock at a price equal to the stock’s fair market value on the day the options are issued. Employees usually don’t recognize ordinary income when ISOs are granted or exercised. But a separate, new 3.8% Medicare tax applies to capital gains, beginning next year. No withholding will be required, though. To beat the tax, employees may sell off ISO stock this year.
Key: The spread on ISO stock that’s not held for at least one year after the ISOs are exercised or two years after the ISOs are granted must be reported on employees’ W-2 forms in Box 1, and on Form 3921.