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Planning for year-end tax reporting

KEEPING A LIST AND CHECKING IT TWICE:

Your checklist to year-end tax reporting

KEEPING A LIST AND CHECKING IT TWICE: PLANNING FOR YEAR-END TAX REPORTING

THE END IS NEAR!The end of the year, that is, and if you are like most companies, you are already thinking about the numerous tasks that need to be accomplished in the next few months and wondering how you will manage everything.

In this white paper, we cover many of the key considerations that need to be made when planning for employee equity year-end tax reporting and provide tips and recommendations to prepare for the busy season.

UPDATE AND AUDIT YOUR STOCK PLAN RECORDKEEPING SYSTEMThe engine behind your tax reporting process is the stock plan recordkeeping system, which contains data about your plan participants, the transactions performed, and income made and taxes paid resulting from these transactions. So you need to make sure your database is accurate and current before generating any tax reports or slips required for your payroll departments to issue year-end tax forms/slips.

• Social security numbers/social insurance numbers (SSNs/SINs) – Missing or incorrect numbers are problematic, as there may be penalties for filing without these unique identifiers, or costs associated with generating amended forms to correct wrong numbers. Working with your payroll department, verify that every participant earning reportable income related to equity transactions is correctly keyed to their SSN/SIN.

• Demographic updates – Other useful information, such as valid mailing addresses and terminations, should be updated. Use this opportunity to do a global update.

• Data audits – Transaction data is as important as participant information: you need to make sure the income and applicable tax withholdings for reportable transactions are accurate. Audit the recordkeeping data that significantly impacts your tax reporting. For example, verify that fair market values have been entered correctly, new grants match to Board of Directors minutes, and exercises and releases have been properly processed. This is also good practice to prepare for the annual audit, performed by external auditors who will look at the data integrity of your stock plan system. Do this work before your auditors do it for you!

• Preliminary verification of transactions – If possible, ask your employees to go online and view their transaction history for the year to confirm that everything looks correct, and to inform the appropriate parties if there are mistakes. This provides another validation point before any tax forms are generated.

• Corporate tax reports – Transactions stemming from your employee equity programs may impact corporate tax reporting, such as tax deductions or deferred tax asset tracking. Work closely with your tax department to understand what information they will need and when they will need it.

No matter what, you need to have confidence in the data required for tax reporting, so build a plan to ensure the integrity of the system BEFORE you provide this information to others.

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Your checklist to year-end tax reporting

GENERATING TAX FORMS/SLIPSYour payroll department or payroll supplier is most likely responsible for issuing W-2s or T4s, and they will depend on data from the stock plan system to do so. Here are some recommendations for working with other departments or suppliers to ensure proper reporting :

• Know the payroll department’s cutoff dates for receiving this data – The payroll department has strict processing times and deadlines for payroll cycles and tax forms/slips, particularly around this time of year. Understand their timing requirements, so delivery of equity data can take place in a timely and orderly fashion – your payroll team will love you for it! Know when data files are required, in what format, and how corrections should be handled. Make sure to account for all types of equity data that need to be reported, from option exercises and restricted stock releases to Section 423 Employee Stock Purchase Plan dispositions.

• Don’t forget the 1099s – Your company will be required to report income and applicable tax withholdings for any non-employee transactions on a Form 1099-MISC. These may include exercises or releases for non-employee directors or consultants, or transactions conducted by a non-employee spouse pursuant to a divorce. The department that generates these forms may not necessarily be the payroll group, so verify who is responsible and understand their timing and data requirements.

• Global reporting adds another dimension – If you grant equity or have stock purchase plan participants outside of your home country, most likely there is income and applicable tax withholding reporting required for those individuals. Verify who is responsible for these filings, the timing of the required reporting, what data needs to be provided and in what format. Often tax reporting cycles for other countries are not based on a calendar year, like in the U.S.

Understanding what you need to provide, how and when you need to provide it, and to whom, drives the second major part of year-end tax reporting. So plan accordingly to gather this information ahead of time, as it will make the delivery process much easier.

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Your checklist to year-end tax reporting

U.S. PARTICIPANT TAX REPORTINGIn the U.S., plan participants will receive one or more of the following tax forms:

If you grant Incentive Stock Options (ISOs) or have a Section 423 Employee Stock Purchase Plan (ESPP), there is an additional reporting requirement under Internal Revenue Code Section 6039, which we wrote about in the October edition of Solium News and our latest edition of KnowledgeWorks. This regulation requires that a notification be sent to participants by January 31 of the following year for any ISO exercise or ESPP purchase; the notification can be in the form of IRS-designated documents (Forms 3921 and 3922 for ISOs and ESPPs, respectively) or in a substitute format that conforms to IRS specifications. Additionally the same information provided in these notifications needs to be filed with the IRS on paper or electronically if more than 250 transactions of one type are reported.

The obvious question to participants is “What do I do with these forms?” Establish a channel to provide explanations of the forms, what data is being reported, and general guidelines on how to use the forms to file their tax returns. For example, explain that equity-related income and tax withholdings reported on a Form W-2 should be matched to the confirmation of exercise or release that the employee can obtain on their Shareworks account, and both documents should be provided to their tax advisor to determine the correct way to complete their tax returns. Always advise participants to consult tax professionals regarding their own situations; you should not provide any personal tax advice for liability reasons.

Form W-2, which reports ordinary income and associated taxes withheld for equity transactions

Form 1099-MISC, which reports the same information as a W-2 for non-employees

Form 1099-B, which reports sales of equity plan shares

Form 1099-DIV, which reports dividends

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Your checklist to year-end tax reporting

CANADA TAX REPORTING

NON-REGISTERED ACCOUNTS

Employee Share Purchase Plan (ESPP)

T5 / RL-3 / NR4

RL-16 / NR4

T5008 / RL-18

Employee Profit Sharing Plan (EPSP)

T4PS / RL-25 / NR4

Tax-Free Savings Account

Not applicable

REGISTERED ACCOUNTS

Registered Retirement Savings Plan (RRSP)

RSP Contribution Receipt: March 2, 2010 – December 31, 2010

RSP Contribution Receipt: January 1, 2011 – March 1, 2011

T4RSP / RL-2 / NR4

Deferred Profit Sharing Plan (DPSP)

T4A / RL-2 / NR4

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Your checklist to year-end tax reporting

PARTICIPANT COMMUNICATIONSQuestions will start coming as soon as tax forms/slips hit participant mailboxes and will continue until tax season ends. Consider a communications strategy to provide tax information to participants, starting BEFORE tax forms/slips are sent out and lasting through tax season. Here are a few tips regarding communications:

• Prepare participants for the tax forms/slips they can expect to receive and head off their inquiries with a Frequently Asked Questions (FAQs) document.

• Make information available through multiple channels: their Shareworks accounts, your intranet, printed handouts, in-person presentations, webcasts, etc.

• Provide a way for employees to ask questions, by email or phone.

• Remind employees to review their tax forms/slips as soon as they receive them and to notify the appropriate contacts immediately if any information needs to be corrected .

TIPS TO MAKE THIS PROCESS EASIERFortunately there are a lot of things you can do to make this entire process easier on yourself, your coworkers, and your plan participants:

• Plan early and plan often – Start thinking about the year-end tax process now, communicate with your internal and external partners to confirm timing and reporting requirements, and make sure you know what data has to be delivered and when.

• Dedicate resources to these tasks – Year-end tax reporting is not an area where you want to skimp on staff to support the work. Make sure you have adequate resources to do everything that’s needed or obtain temporary help to manage the workloads and meet your deadlines.

• Communicate with your participants – A little communication goes a long way, especially when it comes to taxes, so don’t underestimate the value of a great educational strategy.

• Do as much work upfront as possible – Taking steps today to identify and resolve problems can save you a LOT of time and cost to make corrections and file amendments at a later point, so make the investment early.

If you need assistance in preparing for your year-end tax planning, Solium can help you.

For more information and assistance in year-end tax planning, contact your Account Manager.

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Your checklist to year-end tax reporting

ABOUT SOLIUM CAPITALSolium is a leading global provider of web-based stock plan administration technology and services. Our software helps companies automate and manage their stock option and purchase plans, by providing unrivaled comprehensive regulatory and financial reporting capabilities. Founded in 1999, Solium has offices in Canada and the United States.

Solium’s mission and sole focus is to simplify stock plan administration for everyone through technology and services. Our innovative and passionate approach to simplifying and automating tasks, along with our industry-leading Shareworks® software, has made us a disruptive force in the stock plan administration industry.

Since our inception, we have emerged as pioneers in the industry, as we are always striving to change the status quo – and challenge and update traditional methods. We take great pride in being leaders of change and delivering the most innovative stock plan administration experience possible for finance and HR professionals and plan administrators and participants.