tax on foreign exercised stock options

[Tj2008]

I am a US citizen resident in USA employed by a foreign entity. I was allotted stock options in 2022 which I exercised in 2023. At the time of exercise, the employer deducted tax based on fair market value and exercise price. My W2 excludes this notional income. Do I need to add this income while filing taxes? Under what category? And how do I report the taxes they deducted before exercising the stock. Note that I have not sold the stock so this is about income tax and not capital gains if that arises on sale, which I know I will have to pay taxes at the time of sale. 

[pk]

@Tj2008 , I am missing something here -- are you saying that 

(a) if the FMV of the stock at the time of exercising the option was say  $10 and your option to buy was guaranteed at $5, your employer  included  $5 ( the diff between option and FMV)  in your W-2  as income and withheld  taxes  on that   ( Fed, State + Fica ) 

Or

(b) with the same  FMV and Option prices, the employer reported  the FMV price and included that  in W-2  and withheld taxes accordingly

Or

(c) Employer reported none of the above

Please help me understand the situation -- my source of confusion is started by   " deducted taxes  based on FMV and exercise price".  Also did they already recognize the  option price in an earlier year W-2.

I will circle back once I hear from you 

[Tj2008]

None of the above. Nothing is included in the W2.   What they did is that on the exercise date if the exercise value is X, then they said that the tax due on this is Y based on my income tax bracket. They asked me to pay the taxes first to the company account then X-Y was deposited to my trading account in the form of shares.

This (X-Y) is not in my W2. It is only listed as an item in the payslip of the month when options were exercised. there is a comment against this entry that says 'do not increase the pay'. So the question is what do I do with X and Y when it comes to filing returns?

[pk]

@Tj2008 , what I understand  of the situation  is that your employer essentially  treated  the exercise  as a bonus / commission / pay-in-kind and withheld taxes .    In my view this would still be  treated as an addition to wages  i.e. this  income is caused by your employment and not a gift or other income. This implies the taxes  withheld should include  Federal + State + FICA.   If that interpretation is true, then :

(a) you enter this  X ( the FMV / exercise  price of the stocks ) as an addition to your W-2 box 1, Box-3 and Box5 plus  State earnings Box   and  (with clarification from the employer ), add the taxes collected  into Boxes 2, 4, 6 and  into State Taxes collected box.

(b) TurboTax would then compute correctly any taxes due  for all the different  withholdings.

 You would need to keep record  of  the  FMV/ exercise  price  of the stocks as  your basis  for the  future  disposition and  capital gain computation.

Does this make sense ?

[Tj2008]

okay -thank you. My company showed me that the taxes in fact were added to the pay slip. I was missing the entry of ESOP also shown in Box 14 in W2. Thank you for your help!

[pk · Accepted solution]

@Tj2008 , thank you for allowing me to be help.  If your query has been answered , please accept this answer so the thread will close.   You will still be able to add to it 

Is there more I can do for you ?

pk

[Tj2008]

I am sorry for the delay in responding. There's still some confusion -

At the time I recieved the stock option, they created a pay slip which shows that FMV of the stock as pay recieved. They showed the deductions against it as well (federal tax, state tax). However in reality I actually sent a check from my bank account toward this amout of witholding. So while my W2 has the FMV in it and the corresponding taxes as withheld, how do I account for the fact that I actually issued a check for these taxes before the allotted the stock to me?

[pk]

@Tj2008 , if I understand your situation correctly:

(a) you were allotted some shares by your employer at an FMV of US$100

(b) Employer reported this award of US$100 on your W-2;  Employer withheld taxes of  US$ 30 towards taxes ( Federal. State, FICA ) all shown on your W-2

(c)  You wrote a check to the employer covering the taxes withheld.

This would mean that the employer  took your check to defray the  taxes  ( Federal + State + 1/2 FICA).  So all you have to do is o confirm with the employer that indeed  you paid for the taxes and not directly withheld from your pay.  If that is correct then there is no issue -- your W-2 is correct.   If on the other hand the employer withheld from the award ( how, -- your net pay would have  been reduced to pay for this) then you need a corrected W-2 to show this extra withholding. 

Does this make sense  ?