Withholding on Equity Awards: Mastering Complex New FASB ASC 718 Standard and IRS Requirements

A recent change in financial accounting standards (FASB ASC 718) results in questions regarding the U.S. income tax withholding rules applicable to equity compensation. The accounting standard update is generally effective 2017 for calendar year public companies.

Some employers are under the impression that employees can now simply request withholding on equity compensation at the highest marginal individual income tax rate, currently 39.6%. However, this is not as simple as it appears because detailed rules and regulations—and plan provisions—may limit withholding options.

The IRS takes the position that the only ways to withhold on supplemental wages of less than $1 million per year are the supplemental income withholding rates or the aggregate method. Employers and employees alike are wondering whether withholding on supplemental income at the statutory maximum income tax rate is possible. Outside of the mandatory withholding requirement of Reg. 31.3402(g)-1(a)(2) for supplemental wages over $1 million, a 39.6% withholding rate is not expressly permitted.

The Service has for many years strenuously objected to the use of any such informal “work around” to avoid the strictly applicable federal income tax withholding regimes.

Listen as the panel provides tax executives and professionals with practical guidance for businesses that want to withhold federal income tax at a rate higher than the minimum withholding rate through use of the aggregate method and Forms W-4. The panel will also review and explain the impact of plan and grant documents on federal income tax withholding on equity compensation.

1. IRS equity compensation withholding rules
   1. Types of wages
   2. Overview of supplemental wages
   3. Permissible withholding methods
   4. Supplemental wage thresholds (<$1M, >1M)
   5. Form W-4
   6. State tax considerations
   7. Payroll practicalities
2. FASB ASC 718 and impact on tax withholding
   1. Methods of withholding on equity awards
   2. ASC718 requirements for net share settlement
   3. Withholding changes under Notice ASU 2016-09
3. Non-US watchpoints
4. Plan terms and grant documents
   1. Plan term amendments
   2. Withholding of shares and materiality threshholds
   3. NYSE and Nasdaq on plan amendments
   4. ISS on plan amendments
   5. Communication with broker/administrator and employees

The panel will review these and other key issues:

• What are the changes that impact corporate tax management due to FASB ASC 718?
• What are the detailed applicable withholding rules?
• Supplemental wages and withholding employment taxes
• What is the permissible method under IRS regs to withhold on supplemental wage exceeding $1 million?
• What are the two permissible methods to withhold for supplemental wages below $1 million?

Learning Objectives

After completing this course, you will be able to:

• Identify the types of wages subject to FASB ASC 718
• Establish permissible methods of income tax withholding
• Ascertain a permissible method of tax withholding
• Discern the impact on tax reporting due to a use of a nonpermissible method

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules; supervisory authority over other preparers/accountants. Basic knowledge and understanding of types of equity rewards along with three possible withholding methods as seen by the IRS.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).