Collect ISO disposition evidence before completing employee W-2s

An incentive stock option exercise and a later sale of the acquired shares can create different reporting tasks. Retrieve the grant and exercise dates, exercise price, exercise-date value and shares acquired. Then identify whether and when the employee disposed of those shares. The company's exercise register alone may not contain the later event.

The IRS describes Form 3921 as the exercise information statement and explains that failure to satisfy statutory holding-period conditions can create ordinary income on disposition. Ask the stock-plan tax adviser to verify the award's status and applicable conditions. Do not assume every option labeled ISO still qualifies under its actual terms and exercise facts.

Include former employees and shares transferred away from the company's usual broker. An employee leaving payroll does not establish that all later disposition information has been captured. Use the plan's agreed reporting process to request the necessary facts without collecting unrelated personal investment records.

Ask for the shares disposed of, date, gross proceeds and transaction type, linked to the original exercise lot. Distinguish a market sale from a gift, transfer, company repurchase or other event. The adviser needs those facts to decide whether a disposition occurred and whether it is disqualifying under the applicable rules.

Preserve the employee's statement and broker confirmation where available. If the lot is unclear, reconcile it with the exercise history instead of applying the newest or oldest grant automatically. Partial sales require a supported allocation of shares, and an incorrect lot can change both the holding-period analysis and compensation calculation.

Give the adviser sale-price information as well as the exercise spread. Publication 525 describes situations where the ordinary-income amount on an ISO disposition depends on the actual disposition facts. Payroll should use the reviewed amount rather than assuming every sale produces wages equal to the original exercise spread.

Publication 15-B explains that income from a disqualifying disposition of shares acquired through a statutory option has different employment-tax and withholding treatment from an ordinary nonstatutory-option exercise. It describes the relevant box 1 reporting and states that federal income tax withholding is not required on the specified disposition income.

The same guidance excludes remuneration from the statutory-option exercise or disposition from Social Security, Medicare and FUTA wages. Have payroll apply the approved classification, including any state treatment separately. A generic noncash compensation code that adds every tax automatically can produce the wrong result.

The W-2 instructions state that code V does not apply to statutory-option exercises or dispositions. Keep the reviewed ordinary-income entry distinct from the nonstatutory exercise code. Verify the payroll preview before finalizing the year-end wage statement rather than relying on the word stock in a standard earning-code description.

Maintain a register of employees contacted, responses received, disposition lots reviewed and approved wage entries. Separate confirmed no-disposition responses from missing responses. A blank field should not become a factual assertion that the employee retained all shares throughout the year.

Escalate unresolved cases before W-2 filing and ask the adviser how to handle information received later. Preserve any corrected statement and the reason for a wage amendment. The employee's personal income-tax return and the employer's wage reporting require coordination, but the company should not calculate the employee's complete investment-tax result.

Give the employee the reviewed compensation information and retain its link to the underlying exercise and disposition. Publication 525 explains that amounts treated as wages affect the stock-basis analysis. Complete records help the employee's preparer distinguish compensation already reported from the separate gain or loss on the stock transaction.