2 Replies Latest reply: Jan 7, 2014 10:24 PM by tmullin RSS

    What withholding rates do you use for stock compensation?

    barbn

      The federal rate for supplemental compensation under $1M is 25%. But what if the employees regular tax rate is higher than 25%, do you use the higher of the two?  We are running into a problem with executives when reporting stock compensation and we allow the exchange of shares to cover taxes, which the majority of employees elect. The calculations are processed outside of payroll and then provided to payroll for appropriate reporting of compensation and taxes withheld. The amounts have been less than $1M so we have used the flat supplemental rate of 25% for federal tax, but in a some cases the employee's regular tax rate is higher than 25%. Anyone have any insight on this?

        • Re: What withholding rates do you use for stock compensation?
          hkinds

          You have a couple of options when calculating tax on supplemental wages and it is the employers choice which one you use.  Most employers choose the flat 25% method as it is the easiest to implement, however the IRS does offer the aggregate method as an option and it is more likely to get you to the withholding rate based on the employee's w-4 elections.  Below is an excerpt from IRS Publication 15 which explains how the aggregate method works.  I suggest you review the supplemental wage section of Publication 15 to  get a btter understanding of your options withregard to taxation on supplemental wage payments.

          •   If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
          • Re: What withholding rates do you use for stock compensation?
            tmullin

            We don’t have stock compensation but our supplemental compensation we use the higher of the two because our Partners regular rates are over 35% anyway.