Companies Win IRS Delay of Payroll Tax on Stock Options
Public companies that offer some types of stock-based incentives to their rank-and-file workers won a temporary victory Tuesday when the Internal Revenue Service said it would indefinitely postpone assessing employment taxes on these benefits.
Employer groups, widely applauding the move, said the IRS decision gives them a chance to push a bill through Congress that could make these stock benefits forever free of employment taxes--the 15.3% of wages that goes to Social Security and Medicare programs.
And that could be a victory for the 15 million workers who were expected to bear the brunt of the proposed tax, which was expected to raise $23 billion over the next 10 years.
“This is very good news,” said James Delaplane, vice president of retirement policy at the American Benefits Council in Washington.
The IRS decision affects employee stock-purchase plans, which give workers the right to buy their employers’ shares at a discount. The discounts commonly amount to 15% of the market price of the stock. It also affects certain types of employee stock options.
Workers have never paid employment taxes on the gains derived from these discounted stock purchases. But the IRS determined a year ago that this was a mistake and warned companies that it expected to start taxing the benefits in January 2003.
But employers including Microsoft Corp. and Sears, Roebuck & Co. objected to the proposed rule, saying it was unjust and impossible to administer. Lower- and middle-income workers would bear a disproportionate share of the tax burden, the companies said, because the bulk of employment taxes--the 12.4% of income that goes to Social Security--is imposed on wages only up to set caps. The cap, which is adjusted for inflation each year, is currently $84,900.
Moreover, workers pay employment taxes on the dollars that they use to buy the shares and pay capital gains taxes on their profit when they actually sell the shares. Trying to impose employment taxes on the value of the discounts would both double-tax some dollars and create nightmarish bookkeeping for companies providing the plans, said Caroline Graves Hurley, director of tax policy at AeA, a Washington-based trade group representing electronics and technology companies.
The IRS received more than 100 comments about the proposed rule--all of them arguing against the tax, government officials said. The IRS indefinitely postponed its plans while it reviews the comments, which came from individuals, multinational corporations and trade groups. In addition, the agency said that if it eventually revives plans to tax the benefits, it would give companies at least two years’ warning, pushing back the threat to late 2004 or early 2005.
“There was not one comment that said we should do this,” said a Treasury Department official, who asked not to be named. “That’s why you have to go back and look very closely to make sure you are doing the right thing.”
About 15 million Americans are offered employee stock-purchase plans at work and an additional 8 million to 10 million receive some type of stock option, according to the American Benefits Council. These plans allow workers to buy their company’s shares through payroll withholding at a slight discount to the market price. However, the value of the discount can be difficult to calculate, partly because of the day-to-day swings in stock market prices.
“The tax is potentially unfair and enormously complicated,” said Corey Rosen, director of the National Center for Employee Ownership. “It would have been a nightmare to figure out how to do this.”
The House has passed a bill that would permanently ban these benefits from being subjected to employment taxes.
The bill has stalled in the Senate, but several senators have said they may take up the issue in separate legislation.
