Equity Plan Solutions Updates on Nonemployee compensation & One-Day Deposit Rule

United States | August 6, 2020

How to Report Non-Employee Compensation and Backup Withholding    

» From the IRS - Issue Number: Tax Tip 2020-80

There is a new Form 1099-NEC, Nonemployee Compensation for business taxpayers who pay or receive nonemployee compensation. Starting in tax year 2020, payers must complete this form to report any payment of $600 or more to a payee. Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date is February 1, 2021. There is no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Nonemployee compensation may be subject to backup withholding if a payee has not provided a taxpayer identification number to the payer or the IRS notifies the payer that the TIN provided was incorrect. A TIN can be one of the following numbers:

  • Social Security
  • Employer identification
  • Individual taxpayer identification
  • Adoption taxpayer identification

What is Backup Withholding? Backup withholding can apply to most kinds of payments reported on Forms 1099 and W-2G. This means that the person or business paying the taxpayer doesn’t generally withhold taxes from certain payments. There are, however, situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income. This is backup withholding. IRS Extends Relief on Tax Deposits to RSUs and SSARs    

» From NASPP

The One-Day Deposit Rule

Most companies deposit tax withholding with the IRS on either a monthly or semi-weekly basis. If, however, a company’s cumulative deposit liability for all employees exceeds $100,000, under §31.6302-1(c) (referred to as the “one-day deposit rule”), the deposit must be completed by the next business day. It is common for stock plan transactions to cause a company’s deposit liability to exceed this threshold.

The Field Directive

Compliance with the one-day deposit rule is challenging. In the context of same-day sale exercises of NQSOs, the funds to make the deposit are not available to the company until the settlement date, two days after the exercise date. In recognition of this practical consideration, the IRS issued a field directive in 2003 instructing its auditors to treat the deposit liability as accruing on the settlement date for same-day sale exercises of NQSOs. Although field directives are not law and cannot be relied on as precedent, they constitute internal instructions to IRS auditors and, as such, can have a significant effect on the penalties that are assessed during an audit. The 2003 directive was very helpful in addressing the practical considerations for depositing taxes due for NQSOs. Unfortunately, the directive was limited to NQSOs.

The Procedural Update

The update published on May 26, 2020 extends the relief in the directive to SSARs and RSUs. Where exercises of SSARs and payouts of RSUs are subject to the one-day deposit rule, IRS auditors are instructed to treat the deposit liability as accruing on the settlement date. This gives companies until one day after settlement to deposit the withholding taxes before late-deposit penalties are incurred. This is welcome relief for SSAR and RSU transactions in which shares will be sold on the open market to fund the employee’s tax withholding obligations. It is unclear how the procedural update applies to share withholding transactions, which are not subject to the SEC’s rules governing settlement. Since the original directive was issued, the settlement period has been reduced from three days to two days. The update also modifies the IRS’s audit procedures to stipulate a two-day settlement period.

Should you have any questions, please feel free to reach out to your Relationship Manager or me directly. On behalf of AST Equity Plan Solutions, we thank you for your business and appreciate your continued partnership with us.