Need Help 0--restricted Stock Units

[peggysioux]

Client has two 1099-B's - one for $738.47 and another for $38.60. When I asked for purchase prices and purchase dates for stock sales, I was faxed two "restricted unit lapse" sheets. Both sheets show the FMV of the stock at time of lapse was $76.54 per share and a ":0" grant price. It shows that 7.9497 units were used to pay taxes totalling $608.47 for one and the other shows 5.5851 units used to pay taxes totalling $427.48. I would think that the 1099-B's should show a gross proceed of the $608.47 and $427.48. Can anyone help me to understand how the gross proceeds could only be $38.60 and $738.47???

[Koss]

Educated Guess

Here's what may have happened:

Restricted stock, is, well, it's restricted. The company grants the stock to the employee, but he can't sell it for a specified period of time.

The stock itself is a form of compensation. And there are some really, really complicated rules about when the grant of restricted stock is taxed. If he can't sell it when the stock is granted to him, it may not be taxed at that point in time. But when the restriction lapses, and he is permitted to sell it, the FMV of the stock at that point becomes taxable income.

And it's taxed as compensation. The FMV of the stock on the date that he becomes eligible to sell it is considered earned income, and it is subject to FICA.

The FMV of the not-restricted-anymore stock is taxable on the date the restrictions are lifted, even if he chooses not to sell it. That value becomes his basis. Any gain in the value after that date is not treated as compensation, but rather as capital gain.

So if he doesn't sell the stock at the point in time it becomes taxable compensation, and it is subject to social security and medicare, how does the company withhold social security and medicate tax?

By selling enough shares to pay the employee's portion of FICA.

His basis in the shares that were sold is probably zero. The stock was granted to him as a form of compensation, and then it was sold for 76.54 per share. The proceeds were used to produce funds that were withheld as tax on the total FMV of the stock that became not-restricted-anymore.

If I'm right about this, the total FMV that became taxable even though he didn't sell it is already included in Box 1 of his W-2, and the withholding on that income is already included in Boxes 2, 4, and 6.

So why did he get two Forms 1099-B?

Well, they had to sell some shares in order to produce money to pay tax on the aggregate value of the stock that became not-restricted-anymore. And when they sold those shares, that generated another taxable transaction, which required more withholding...

So why isn't it an infinite chain reaction?

Because on the second transaction, they somehow grossed it up.

EDITED at 7:25 PM

Okay, wait a minute. When they sold shares to get the cash to pay the FICA, that transaction did not require any withholding, because it was just a regular stock sale. It would not have been treated as compensation, because all the stock was already taxed as compensation.

So if the FMV of all the stock is already in the W-2, his basis in the shares that were sold may be equal to the proceeds.

But that still doesn't really explain why there two different transactions. Maybe one was for federal and state withholding, and the other was for FICA.

Maybe.

Good luck. To find out if I'm even close on all this, you're gonna have to ask your client a bunch of questions...

[Koss]

Starting Point

Before you even call the client again--

Check his Form W-2, and see what kind of kinky codes he has in Box 14.

That may get you about two-thirds of the information you're looking for.

[peggysioux]

Nothing showing in box 12 or 14

There is nothing showing on W-2 in box 12 or box 14.