ESPP Offset Generates a W2

[freddytax]

My former employer generated a 2024 W2 for ESPP "offset" which I had already paid taxes on.  I sold stock but I have not worked there in two years.  Now there is a tax event with the IRS for something I already paid the IRS for. 

Yes, I asked my former company this question but please understand that these people simply go through the process and really don't know the answers.

I have worked for other companies that have an ESPP program and have never had a subsequent tax event.  Any help is greatly appreciated.

[freddytax]

And I expect a 1099-B but I have no idea what this has to do with making money and a W2.

[AmyC]

Taxes on ESPPs are levied when you  sell your stock--both as compensation income and as capital gains.

Your employer purchased stock on your behalf and you should have received Form 3922 -- "Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)". This form is purely informational, but is important for record-keeping.

When you sell  the stock, the company will send a 1099-B, as any broker would. Any discount received on the initial purchase or other funds deemed "compensatory" will then be reported as income on your  W-2 for that tax year. 

That income on your W2 is part of the basis you need to be sure is reported when you enter the 1099-B. It is often not included in the basis listed on the 1099-B. It could be, so be careful and use your form 3922 and w2 to determine your correct basis.

[freddytax]

Thanks, AmyC!  Is this something new?  I've sold ESPP over the years and usually just report my cost basis and any gain or loss per the 1099-B.  Do I report the W2 earnings and then make an adjustment within TurboTax?  Do I report my employer information for a place where I have not worked for nearly two years? 

Thank you for your help!!

[freddytax]

So I get a 15% discount on my stock price only to get taxed at a regular ordinary % rate for that discount that will be a higher rate?  If I'm doing my math right this makes no sense for a company to have an ESPP program, no?

[AmyC]

Reporting rules changed over time. You will need to report the W2 and be sure that basis is included in the 1099-B. Sometimes it is included. Your basis in the stock is the amount you paid plus the discount you received. If not, adjust the basis in the program. If you hold the stock, you will have capital gain rather than ordinary income, which is more favorable.

The rules for qualifying statutory stock options (ISO and ESPP) are:

• One year after the stock was transferred to the taxpayer or
• Two years after the option was granted

To simplify, you bought stock for $85 that should have cost $100. You hold it and sell as a capital gain later for $200. This is a much better deal than if your company just gave you a $15 bonus occasionally. It benefits both of you to be invested in the company stock.