IRS Going After Stock Purchase Plans

The Internal Revenue Service has announced its intention to consider applying Social Security tax to stock purchase plans.

A stock purchase plan permits employees to buy shares in their company stock at a discount - typically 15 percent below market price.

The IRS has decided that it might want to impose the Social Security tax (7.65 percent to the employee and a matching 7.65 percent to the employer) on the difference between the stock's market price and the discounted purchase price.

The IRS claims the difference between the purchase price and the market price of the stock represents a form of compensation and therefore should be subject to the Social Security tax.

This does not represent a change in law, merely a more detailed interpretation of existing law. The IRS will impose this tax starting in January 2003 unless the IRS has a change of heart between now and then or unless Congress votes to block the tax.

Representative Amo Houghton, R-NY, chairs the House subcommittee that oversees the IRS. He is currently drafting legislation to block the tax.

Many companies and trade associations are already lobbying Congress to block this tax. "We roll our eyes and say where is that money going to come from?" stated Caroline Graves Hurley, director of tax policy at the American Electronics Association. "That money has already been subject to withholding taxes. The poor employee is going to have to pay from his paycheck."

It is estimated that approximately 4,000 companies offer discounted stock purchase plans to their employees.

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