Don't Miss These Quick Tips for Year-end Tax Reporting

For companies that offer an equity compensation program for employees, year-end planning has a lot of moving parts. From reviewing your equity programs and practices to budgeting and forecasting equity costs, there's a lot to consider as the year winds down. At the top of your list should be preparing for year-end tax reporting. Careful reporting of equity compensation is critical for compliance with IRS regulations and ensures employees and other interested parties receive accurate tax documents. 

Tax reporting can be complex if you don't have all the information you need. Overlooking tax and legal equity policies can create both regulatory and reputational risks. With that in mind, here are some helpful tips to consider about common tax and compliance reporting areas for equity compensation to put into play before next year. 

1. Understanding your key reporting dates and requirements

First, it's important to know what you must report and when. For equity plans, this means forms like Form 3921 (for ISO exercises) and Form 3922 (for qualified ESPP transfers) under IRC §6039. For each ISO exercise and ESPP share transfer during the calendar year, the company must furnish the information statement to the employee by Jan 31 of the next year and file the information return with the IRS by Feb 28.

Missing or failing to file these impacts is not just a matter of compliance but creates risk for penalties. As an administrator, make sure to stay on top of deadlines to protect your company from infractions. 

Now, how about your employees? For plan participants, you'll need to coordinate the taxable event data to payroll or to the 1099/1096 process. NSO exercises, RSU vesting, ESPP dispositions all trigger taxable compensation (or capital gains) and must show up appropriately on employee W-2s or 1099s.  

Quick tip:
Here's a helpful idea: Create a master calendar of deliverables for your equity plan year-end. To stay organized, make sure to include the following:

• Forms 3921 / 3922 issues and filings
• Payroll data submission for taxable events
• Reconciliation of equity exercise/vest/release data
• Participant communications
• Audit/tax-review and preparation 

2. Reconciling the data behind the scenes

Behind the scenes data reconciliation is an area plan administration teams often overlook—but shouldn't! This process is critical because when you have un-reconciled items, you put your company at risk for mis-reported taxable compensation, inaccuracies in participant tax reporting, and unwanted auditing.

Your systems that track plan activity like equity management and payroll should be connected and talking to each other and year-end is the best time to verify that they are sharing the same data.   

Quick tip:  
Build in early Q4 data "freeze" checkpoints. In other words, by mid-November or early December, run reconciliation reports, note exceptions, and resolve them by year-end. Consider it a "close-the-books" process to follow each year.

3. Coordinate with payroll/tax/finance partners

One of the most common points of contention is between the equity team and payroll or tax reporting groups. As stock plan administrators, you're deeply involved in the operational mechanics (grant, vest, exercise, sale) but your outputs feed other functions.

• For taxable events (RSU vesting, non-qualified stock option (NSO) exercise, ESPP disqualifying disposition) passing accurate numbers to payroll for W-2 inclusion or to accounts payable/1099 for non-employees is essential.
• Include payroll and make sure they're aware of the correct tax treatment to avoid incorrect tax reporting.
• For former employees (or recipients of awards after termination) you'll want to ensure reporting flows to the correct category (W-2 vs 1099) and correct tax year. Equity events don't always neatly align with termination dates, so be clear on timing and treatment.

Quick tip:
Schedule a year-end "get on the same page" meeting with payroll, tax, and finance teams to review the schedule, provide draft files of taxable events, and identify any special events such as terminations, large early exercises, and ESPP sales that may drive unusual tax situations.

4. Communicate, communicate, and communicate again

While much of your work is internal, we can't forget the people who benefit most from equity programs, your participants. When participants are confused, surprised, or feel left out, the trust you've established can deteriorate fast and affect company culture.

• Let participants know what to expect such as what to prepare for if they exercised an ISO. The forms they will need to submit at tax time, and the importance of keeping this information with their tax documents package.  
• Explain what they will (or may) receive. This includes W-2, 1099, cost basis adjustments, supplemental statements, etc. Many participants are unaware of the complexity of equity compensation taxability.
• Consider creating a pre-year-end bulletin with a spotlight on items such as late-year exercises, year-end transactions, ESPP sale deadlines, blackout windows, and potential holding period considerations.
• Encourage participants to hang on to key documentation including grant agreements, vest/exercise records, cost basis worksheets, and supplemental information from brokers that they may need when filing. 

Quick tip: 
Consider creating a one-page equity tax snapshot guide for your participants. Include helpful links, contacts, and tips for more info. It's not tax advice but rather clarity and support for your employees.

5. Be ready for the special situations

As you know, no year ever goes as planned. Something seems to always happen at the last minute that can bring lots of surprises. Equity compensation certainly has its share and can make your job as administrator unnecessarily stressful.  

Some examples:

• ISO exercises with no sale in year. For ISOs, the exercise itself may trigger AMT—not regular tax—and year-end could require you to provide data that participants need to evaluate for AMT exercise. You may want to highlight this internally and to participants.
• Terminated employees and consultants. If someone who had a vest or exercise was terminated during the year, you must ensure the event gets captured properly in year-end reporting even if they are no longer active in your HR system.
• Multiple jurisdictions. If your company has employees in multiple states or countries, withholding/tax rules may vary. Also, changes in payroll tax caps or rates need to be incorporated.
• Late or manual transactions. Trades or cancellations that happen in the first week of January but relate to December business are an example. You'll need to decide appropriately how to treat them for tax year. 

6. Protect yourself with thorough documentation 

Year-end for equity plans can be thought of as a way to close the books for the year. The process is more than just preparing to report. You're creating a record that your company followed processes, captured all events, reconciled, and filed timely. If the Internal Revenue Service or another regulatory body ever reviews, you want solid backup.

• Keep documentation of your reconciliations, your communication to payroll/tax, your participant notifications, and your internal checklist.
• Ensure you retain archives of equity data, dated reports, and correspondence.
• If you discover errors, document the correction, date it, and remember the lessons learned.

Remember, by treating your process as audit-ready, you give your team and your company strong defense and credibility.

It's all about the people

Once the dust settles during year-end tax planning, remember, you're supporting people—employees, participants, and ex-employees who most likely are navigating financial and tax challenges. Whether they are exercising options for the first time or selling ESPP shares, they are counting on your clarity and guidance.

An important time for your business

Year-end for stock-plan administration is a strategic moment for your business and an important time for your participants. It's much more than checking boxes. It's the time for closing the current year cleanly, preparing the company and participants for tax season, and building momentum for next year. Combine this with good communication and you'll elevate the value of your company's equity-compensation program while supporting your participants.

If you have questions or need advice on your company's year-end equity planning, our team of financial professionals is always available to help.