Key Employee Phantom Stock

[sali]

I have a client who received payment as part of a Phantom Stock Plan. The Fair Market Value was reported on Form 1099 MISC box 7. Is this subject to Fica and Medicare?

[DaveinTexas]

I found this info

I am curious to see what others think. I will have my first exposure to this with a client for his 08 return:

Reg. § 31.3121(v)(2)-1(b)(4)(ii), and -1(b)(5) Ex. 8. Section 3121(v)(2) provides
a special timing rule for nonqualified deferred compensation. If phantom stock is
nonqualified deferred compensation within the meaning of § 3121(v)(2), then
under the special timing rule the value of the phantom stock is wages at the time
credited to the employee’s account. The amount of FICA wages is the fair
market value of the phantom stock when credited to the employee’s account. If
the phantom stock is nonqualified deferred compensation, and the value of the
phantom stock was included in FICA wages when credited to the employee’s
account, then any appreciation in the value of the stock is not FICA wages
when the executive cashes-out the phantom stock. When the executive cashes
out, any appreciation is gross income to the employee subject to FITW.

Hope that helps.

[sali]

According to my client, she never paid any tax on anything and nothing was ever included in her wages. Supposedly (I have not yet seen it) the proceeds from the installment payment on the phantom stock were reported on 1099 MISC. Does this mean the proceeds should be reported on Sch C subject to FICA?

[DaveinTexas]

This is the part that stumps me

The Reg states that:

When the executive cashes out, any appreciation is gross income to the employee subject to FITW. I would think that the value at the time that the stock was credited to the employee would be subject to FICA, FUTA and SUTA. Now if the stock was credited to the employee's account and she cashed it out at the same time, then the proceeds should be reported in box 1 as gross wages on the W2.

If this line of thinking is correct, then the employer needs to file a corrected 1099MISC with $0 in box 7 and issue a W2.

Anyone else know anything about this and am I right?

TIA