How do I report the compensation income from an ISO sale if it’s not included on my W-2?

[stevenyan]

I am trying to report taxes on sales of ISOs from my employer and confused about how Turbotax is handling compensation income from these sales. I am immediately exercising and selling my ISOs in the same calendar year, and my understanding is that no taxes are withheld on these sales.

Here’s an example to illustrate why I’m confused:

When I import one of my sales from my 1099-B, the gross proceeds are $3,499.82. The cost basis is $9.00, which is inline with the option exercise price ($0.09), so the realized gain is $3,490.82 which I would be taxed on at ordinary income tax rates.

As suggested by other posts in the community, I chose to follow the “Guide me step-by-step” for this sale in Turbotax and I enter the additional Form 3921 details from my employer. After following the interview in Turbotax, I’m told that my cost basis for this sale should be adjusted to $3,492.00 and the spread between the exercise and sale price ($3,483.00) counts as compensation income, not capital gains (see attached)

The problem is that I’m fairly certain none of this compensation income is included in Box 1 of my W-2. The ISO sales are stated in Box 14 of my W-2, but I’m fairly certain none of the amount is included in Box 1. 

Since this compensation income is not included in my W-2, and Turbotax is adjusting the cost basis of these ISO sales such that the short-term gain is very little, how do I account for this compensation income in my return so I don’t underpay my taxes?

[TomYoung · Accepted solution]

"The problem is that I’m fairly certain none of this compensation income is included in Box 1 of my W-2. The ISO sales are stated in Box 14 of my W-2, but I’m fairly certain none of the amount is included in Box 1."

You need to clear that up with your employer.  Box 14 is in the main a simple "memo" box, telling employees something about their W-2.   I'd expect that most commonly the information is about what's been included or excluded from Box 1.  In your case the Box 14 amount should be included in Box 1, but I guess a mistake could have been made, so get that settled first.

"Since this compensation income is not included in my W-2, and Turbotax is adjusting the cost basis of these ISO sales such that the short-term gain is very little, how do I account for this compensation income in my return so I don’t underpay my taxes?"

The way you do that is to work through the "Stocks, Mutual Funds, Bonds, Other" interview all the way to the bitter end.  You're not done when you've simply entered all your trades.  Keep pressing "done" or "continue" until a page comes up that tells you what TurboTax has calculated as compensation and asks you if that's the amount reported on you W-2, (and included in Box 1 of course).  If you answer "No" here TurboTax will include that amount on line 7 of your Form 1040.

Tom Young

[dgoder]

What do I do when some of my compensation income is included in W2 and some is not? Turbo Tax deals with it as a whole amount

[TomYoung]

I suspect you're not dealing with an ISO but, instead, have sold ESPP stock?

[dgoder]

No, it was all ISO. I left the company over New Year 2017 and my first exercise is included in W2, however, the subsequent exercises are not.

[TomYoung]

It's the disqualifying sale of the stock, not the exercise, that creates compensation.  So are you saying here that you had several disqualifying sales of stock acquired via an ISO but only the first of those sales is reported as compensation on the 2017 W-2, but the others were not?

[dgoder]

Yes. Correct.

[TomYoung]

Well then the thing to do is to report the 1st sale as a plain-vanilla sale using TT's default 1099-B entry form.  Assuming the 1099-B is only reporting the out of pocket cost of the stock as the basis, then click on the "I'll enter additional info on my own" blue button.  On the next page enter the correct basis in the "Corrected cost basis" box which is the sum of the out of pocket cost and the compensation reported on the W-2.  (I"m assuming the sale was for the GROSS number of shares in the grant.  If that's not the case then work out the correct basis to use as a per share figure and use that.)

Then the rest of the sales you can enter using the ISO step by step interview.  Work completely through the "Stocks, Mutual Funds, Bonds" interview.  You're not done when your entered the trade information.  Eventually you'll come to a page that tells you the compensation TT has calculated and asking if that's the amount on your W-2.  You'll say "No" and TT will include that amount on line 7 of the Form 1040.

[stevenyan]

@TomYoung thanks for this -- turns out that Box 1 of my W-2 didn't have the right amount despite Box 14 having the right numbers. Once I corrected this, and ensured I set the right cost basis on Schedule D using Form 3921, all looks good. God bless the interwebs.

[Charlie]

@TomYoung you said "until a page comes up that tells you what TurboTax has calculated as compensation and asks you if that's the amount reported on you W-2"  TurboTax never asks me this question.  Like the OP, my company did not include the amount on my W-@, and TT (Home & Business) will not let me remove the adjustment.  Any ideas?

[TomYoung]

"TurboTax never asks me this question."

Then either:
    1 ) You didn't use the appropriate step by step interview, or
    2) You stopped too soon in the "Stocks, Mutual Funds, Bonds, Other" interview.

That interview and the action of reporting the compensation and asking if it's on the W-2 has been virtually unchanged for at least 10 years.

"TT (Home & Business) will not let me remove the adjustment."

I'm not sure exactly what "adjustment" was made and by what or whom.  If  say delete the trade, enter it manually working through the appropriate step by step interview and don't stop when you seem to have entered everything for the trade itself.  Keep clicking on "Continue" or "Done" or whatever comes up and you will eventually come to that "Your Employee Stock Plan Results."  (I think that's the name of that page.)

[Charlie]

Thank you for the quick reply!

Wish I could give you a screenshot.  I did enter my transaction in "Stocks, Mutual Funds, Bonds, Other", and have re-entered them several times.  Here's the log of a new try with fictitious numbers.

1)  Add more sales
2)  Did you get a 1099-B?  No
3)  Select:   Incentive Stock Option plan (ISO)
4) Identify the Employer.  Select my company.
5)  Select "Sold shares exercised in 2017"
6)  Date sold:                           12/25/2017
     Number of Shares Sold:      200
     Selling Price per Share       12.00
7)  Total Proceeds Summary - hit next
😎  How did you buy the shares you sold?   "At the same time for the same price"
9)  Select "No, I did not receive Form 3921"

       Number of Shares exercised          200
       Date options were exercised          12/25/2017
       Market Price on Date options were exercised   12.00
       Exercise price per share                9.00
       Commissions                                  0
       Date options were granted          1/1/2015

[Charlie]

part 2

10) Stock Splits?    No
11)  Reinvested Dividends?    No
12)  Your Incentive Stock Option (ISO) Details

[Charlie]

part 3 (TT won't let me enter/paste my answer.  Tried on Safari &  Chrome)  Grrr

you have zero gain on this ISO sale
Net sales price:                                       2400.00
Price Paid                       +1800
Compensation income     +600

[Charlie]

cost basis          2400                -2400


Press Continue
13)  Did you sell any other investments and didn't get a 1099-B?    No


and it's done.  The summary line now says:

Description                                 Gross Proceeds           Gain/(Loss)
200 sh   "My employer"             2400                            0.00

I saw no opportunity to add/remove the compensation number.  Any ideas?