IRS Wants to Collect Payroll Tax on Stock Options

The IRS is about to make history if it is successful with its plan to make incentive stock options (ISOs) and employee stock purchase plans (ESPPs) vulnerable to Social Security, Medicare, and other payroll taxes. Normally it's Congress that makes the rules about what does and doesn't get taxed, but this time the IRS is stepping into the circle and trying to assess a new tax that will add an estimated $23 billion to the federal coffers over the next 10 years.

Last fall, the IRS issued proposed regulations that clarify the law on withholding payroll taxes on ISOs and ESPPs and suggested that the withholding would be effective on January 1, 2003, leaving Congress with over a year to address the law.

During the past week the IRS held a public hearing at which members of the Securities Industry Association, the American Benefits Council, the Software Finance and Tax Executives Council, the American Payroll Association, the National Association of Stock Plan Professionals and others joined executives from Microsoft and Texas Instruments to speak out against the action.

Two bills that would overturn the plan are making their way through the Senate and voting is expected on them this summer. One bill is Senate Bill S 1383 and is sponsored by Senators Pat Roberts, R-KS, and Hillary Clinton, D-NY. The other is a bill sponsored by Representative Amo Houghton, R-NY. The Houghton bill has been attached to the Pension Security Act, HR 3762.

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