So I'm not sure why $358 is listed at all. Is it to tell me I need to add it to wages? If this is the case I'm puzzled why it wouldn't have been added to Box 1 already.
Related question. As context I am very familiar with how to use TurboTax for ESPP. Upon entering my 1099 and 3922 information from eight different lots I sold last year, TurboTax calculated my ESPP compensation income of $2,000 (nowhere close to $358). Now I'm very confused. It appears it has NOT been added to my W-2, but that quirky $358 is showing up on my W-2 for ESPP (which makes no sense). Help! I'm so confused. Maybe it is my payroll that is the problem and not me. My gut is telling me just to tell TurboTax to treat the $2,000 as income since I'm not seeing it anywhere on W-2 or in paystubs. And ignore the $358 since it was added and subtracted from the same paystub leaving taxable income unchanged.
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You should really check with your employer here, but typically amounts shown in Box 14 are "memo" notes telling you something about your W-2, usually amounts that are included in Box 1.
I'd say with high confidence that this $358 is included in Box 1. So, for example, if you have a salary of $30,000 per year, sold some stock acquired via an ESPP and that sale created compensation income of $358, then the Box 1 amount would be $30,358. The note in Box 14 "explains" to you why you're not seeing "$30,000" in Box 1.
"Upon entering my 1099 and 3922 information from eight different lots I sold last year, TurboTax calculated my ESPP compensation income of $2,000 (nowhere close to $358)."
Yes, this isn't an uncommon occurrence IF you have a mixture of Qualified and Disqualified sales of the stock acquired via an ESPP AND the employer is only reporting the compensation relating to the Disqualified sales, which frequently is the case.
Up until 2014, (if I'm remembering correctly), TurboTax could handle this situation, properly. That is the "Your Employee Stock Plan Results" page used to present the compensation it calculated ($2,000), asked you how much of this compensation was reported on your W-2 ($358), and then take the difference ($1,642) and include that amount in wages and salary line of the Form 1040.
TurboTax changed that approach - claimed that too many people were confused here - and took away the option to tell TurboTax how much of the compensation was already reported on your W-2.
Now that page presents a simple question of "Included on your W-2?" to which you can only answer "Yes" or "No" and either choice results in an error on your Form 1040. Answer "Yes" and the missing $1,642 of compensation is not included as wages, (incorrectly), or answer "No" and the entire $2,000 is added to wages, (incorrectly). There are some workarounds you can employ here.
The first way is to eliminate the Disqualifying trades. Enter those trades on the default 1099-B entry form and simply correct the basis figure reported by the broker. You do that by clicking 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. The correct basis is (number of shares sold) x (correct per share basis, which includes the compensation per share)
TurboTax will report the sale on Form 8949 "as reported by the broker" but will put an adjustment figure into column (g) of the Form, a code "B" into column (f) of the Form, and the correct amount of gain or loss which includes the adjustment. Those Disqualifying trades are now correctly reported: the compensation element is on the W-2 and you've used the correct basis for the sales.
That will leave only the Qualifying trades having been entered using the ESPP step by step process and the compensation calculated by TurboTax will only encompass those trades. Then when you get to that "Your Employee Stock Plan Results" page you would answer "No." TurboTax will then make the correct adjustment to the wages line of the Form 1040 and those trades will have the correct basis reported on Form 8949.
The other way you could handle this is leave things as they are and answer "Yes" to TurboTax's question about the amount reported on your W-2. TurboTax will make no adjustment to the wages line of Form 1040, but your trades will be correctly reported. Then, you tell TurboTax about the wages adjustment needed by:
Starting the "Miscellaneous Income, 1099-A, 11099-C" interview.
Starting the "Other income not already reported on a Form W-2 or Form 1099" interview.
Answering "Yes" on the "Other Wages Received" page.
Entering $0 on the "Wages Earned as a Household Employee" page.
Entering $0 on the "Sick or Disability Pay" page.
Answering "Yes" on the "Any Other Earned Income" page.
Ticking "Other on the "Enter Source of Other Earned Income" page.
Entering a description and an amount on the "Any Other Earned Income" page.
Finally, you could report all the trades as you have, but use a slightly different version of the employer's name for Qualifying and Disqualifying trades. You could answer "Yes" to the employer under which you reported the Disqualifying trades and answer "No" the employer under which you reported the Qualifying trades.
Tom Young
You should really check with your employer here, but typically amounts shown in Box 14 are "memo" notes telling you something about your W-2, usually amounts that are included in Box 1.
I'd say with high confidence that this $358 is included in Box 1. So, for example, if you have a salary of $30,000 per year, sold some stock acquired via an ESPP and that sale created compensation income of $358, then the Box 1 amount would be $30,358. The note in Box 14 "explains" to you why you're not seeing "$30,000" in Box 1.
"Upon entering my 1099 and 3922 information from eight different lots I sold last year, TurboTax calculated my ESPP compensation income of $2,000 (nowhere close to $358)."
Yes, this isn't an uncommon occurrence IF you have a mixture of Qualified and Disqualified sales of the stock acquired via an ESPP AND the employer is only reporting the compensation relating to the Disqualified sales, which frequently is the case.
Up until 2014, (if I'm remembering correctly), TurboTax could handle this situation, properly. That is the "Your Employee Stock Plan Results" page used to present the compensation it calculated ($2,000), asked you how much of this compensation was reported on your W-2 ($358), and then take the difference ($1,642) and include that amount in wages and salary line of the Form 1040.
TurboTax changed that approach - claimed that too many people were confused here - and took away the option to tell TurboTax how much of the compensation was already reported on your W-2.
Now that page presents a simple question of "Included on your W-2?" to which you can only answer "Yes" or "No" and either choice results in an error on your Form 1040. Answer "Yes" and the missing $1,642 of compensation is not included as wages, (incorrectly), or answer "No" and the entire $2,000 is added to wages, (incorrectly). There are some workarounds you can employ here.
The first way is to eliminate the Disqualifying trades. Enter those trades on the default 1099-B entry form and simply correct the basis figure reported by the broker. You do that by clicking 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. The correct basis is (number of shares sold) x (correct per share basis, which includes the compensation per share)
TurboTax will report the sale on Form 8949 "as reported by the broker" but will put an adjustment figure into column (g) of the Form, a code "B" into column (f) of the Form, and the correct amount of gain or loss which includes the adjustment. Those Disqualifying trades are now correctly reported: the compensation element is on the W-2 and you've used the correct basis for the sales.
That will leave only the Qualifying trades having been entered using the ESPP step by step process and the compensation calculated by TurboTax will only encompass those trades. Then when you get to that "Your Employee Stock Plan Results" page you would answer "No." TurboTax will then make the correct adjustment to the wages line of the Form 1040 and those trades will have the correct basis reported on Form 8949.
The other way you could handle this is leave things as they are and answer "Yes" to TurboTax's question about the amount reported on your W-2. TurboTax will make no adjustment to the wages line of Form 1040, but your trades will be correctly reported. Then, you tell TurboTax about the wages adjustment needed by:
Starting the "Miscellaneous Income, 1099-A, 11099-C" interview.
Starting the "Other income not already reported on a Form W-2 or Form 1099" interview.
Answering "Yes" on the "Other Wages Received" page.
Entering $0 on the "Wages Earned as a Household Employee" page.
Entering $0 on the "Sick or Disability Pay" page.
Answering "Yes" on the "Any Other Earned Income" page.
Ticking "Other on the "Enter Source of Other Earned Income" page.
Entering a description and an amount on the "Any Other Earned Income" page.
Finally, you could report all the trades as you have, but use a slightly different version of the employer's name for Qualifying and Disqualifying trades. You could answer "Yes" to the employer under which you reported the Disqualifying trades and answer "No" the employer under which you reported the Qualifying trades.
Tom Young
Tom,
You seem to know your stuff, as I have come across multiple posts by you. Hoping you can help! I am trying to solve how to treat my ESPP sale, which is qualified and I have met the holding period.
While I can manually calculate the ordinary income (what a bore!) - I cannot figure out if my company already includes this income in box 1 or not! There are no memos in box 14 indicating this. I don’t want to double pay (and asking my employer feels like a black box in a giant company that’s outsourced everything). *Note - when I use Turbo Tax to “walk thru” the calculation of how much to adjust my cost basis, it puts the cost basis at zero! Very frustrating.
While I have you, I do have info in box 12 code VV - NQSO. The funny thing is... I didn’t realize I had any of those... is that related to RSUs? Or... reinvesting dividend in stock?
thanks for helping me!
- Ana
"I cannot figure out if my company already includes this income in box 1 or not!"
Very, very commonly Qualified Dispositions are not included in the W-2, so I would guess that's your situation. That question really has to be asked to your employer. A Human Resources or Payroll department should really know that off the top of their heads.
"Note - when I use Turbo Tax to “walk thru” the calculation of how much to adjust my cost basis, it puts the cost basis at zero!"
Nothing has changed that I'm aware of in this part of the program or in this area of the law, but since I decided not to transition to the "Champions!" program I haven't really tried to keep up. But this area of the program - we're talking about the ESPP "guided" interview - has always worked in the past and properly calculated compensation and basis for the sale of stock acquired via an ESPP. The basic input is the information from Form 3922 and in the case of a qualified disposition the compensation and basis adjustment is the smaller of the discount at the grant date or the actual profit. If you're getting a basis of $0 then you're entering something incorrectly.
" I do have info in box 12 code VV - NQSO. The funny thing is... I didn’t realize I had any of those... is that related to RSUs?"
Both NQSOs and RSUs are considered "non-statutory" options and both create compensation at either exercise (NQSOs) or vesting (RSUs). I think it's most common to indicate compensation from vesting of RSUs in Box 14, but I know it's sometimes reported in Box 12 instead. Either way, you know the amount so you should be able to calculate the basis of the acquired stock.
Hi. Thanks for this discussion.
I imported my 1099-B from the broker (or whatever its called) website, and the RSU and ESPP 1099-B was imported into TT. I then went through each of the lines of groups of stock that were sold, and updated the supplemental information by adding in the various prices TT asks for from the 3922 (price on purchase date, grant date, paid price etc). Every time I entered each, for ESPP, my tax due went lower and lower, because the cost basis was going higher, because the cost basis updated to not take into account the 15%, which I believe is correct.
I have both long term and short term covered (I dont know if that is qualifying or disqualifying) on my 1099-B.
I also left Box 2 (which asks whether it is an ordinary gain or loss) for each of these stocks unchecked, because there was no box 2 on the 1099-B.
At the end, when I said done with all the 1099-B accounts, it asked me whether any of the ESPP are included in my W2. For RSU I said yes, but for ESPP, I wasn't sure, so I clicked No, and my tax due jumped up back to the amount that it was before I started entering all the supplemental 3922 information. So all those hours of figuring that out was wasted. What was the point of TT asking me all those questions about updating the cost basis if it will ignore all that anyway?
Other information I know is that ESPP is pre-tax.
The W2 does mention RSU in box 14. I don't see ESPP specifically listed, but could be in box 1.
Thank you.
Your employer likely included the compensation income for your ESPP on your W-2, particularly if you were still employed by the company when you sold your ESPP shares. However, to be certain that is the case, you need to check with your employer. You are correct in that if the ESPP ordinary income element is included on your W-2, it will be added to the wage amount in box 1.
At least some of the information TurboTax needs relates to whether your ESPP sales were qualifying dispositions (sales) or non-qualifying dispositions. What distinguishes a qualifying disposition from a non-qualifying disposition is timing. In a qualifying disposition, you meet the holding period if you don't sell your stock until the end of the later of:
If you meet the above holding period, then your ESPP sale is a qualified disposition, and you are eligible to receive favorable tax treatment as it relates to the compensation element of your ESPP.
Thank you, @GeorgeM777!
Yes, still employed, but the company got sold which is why the stock was sold. But the company name remains the same. It just no longer has stocks of its own.
Based on your definition, there are some qualifying and some non qualifying.
IF ESPP is included in W2 Box 1, is it the capital gain amount that is included? The stock sale amount that is taxable is confusing, because of the many difference in stock prices based on grant date, purchase date, etc and the 15% discount, and also because I am buying stock pre-tax money.
I don't think my company included any of the ESPP on the W2 box 1, but what I don't understand is why TT had me enter all that information and tell me that I'm saving on taxes, and THEN ask me if the amount is included in my W2, and upon saying No, it removed all those tax savings. It was such a big effort to figure that out, and turns out, it was pointless. TT should have asked me before hand whether it was included in the W2, and upon me saying no, it could have said, sorry you don't qualify for these tax savings so don't enter all that information, or even if it didn't say that, it could still have me enter the 3922 information, and as I did and increased each of the cost basis, it would then NOT have reduced my tax due amount and I'd know immediately that it is not worth entering in the ESPP information. The ESPP seemed pointless and it seemed only the 1099-B was needed, considering ESPP income was not included in W2 box 1.
No, the capital gain amount would not be included in box 1 on the W-2. In fact, the capital gain or capital loss, if any, would not be included anywhere on the W-2. The capital gain/loss amounts need to be calculated by the taxpayer.
Here are two examples of qualified dispositions involving ESPP both of which were taken from the Treasury Regulations that relate to ESPPs. These examples may be helpful as you work through this part of your tax return. On a going forward basis, if you know the information as expressed in the following examples, you can avoid the TurboTax screens that specifically relate to ESPPs (or RSUs) and enter your ESPP information as if it were a regular stock transaction.
Example 1
On June 1, 2010, Corporation GG grants to Employee P, an employee of GG, an option under GG's employee stock purchase plan to purchase a share of GG stock for $85. The fair market value of GG stock on such date is $100 per share. On June 1, 2011, P exercises the option and on that date GG transfers the share of stock to P. On January 1, 2013, P sells the share for $150, its fair market value on that date. P's income tax return is filed on the basis of the calendar year. The income tax consequences to P are as follows -
(i) Compensation in the amount of $15 is includible in P's gross income for the year 2013, the year of the disposition of the share. The $15 represents the difference between the option price ($85) and the fair market value of the share on the date the option was granted ($100), because the value is less than the fair market value of the share on the date of disposition ($150). For the purpose of computing P's gain or loss on the sale of the share, P's cost basis of $85 is increased by $15, the amount includible in P's gross income as compensation. Thus, P's basis for the share is $100. Because the share was sold for $150, P realizes a gain of $50, which is treated as long-term capital gain.
Example 2
Assume the same facts as in Example 1, except that P sells the share of GG stock on January 1, 2014, for $75, its fair market value on that date. Because $75 is less than the option price ($85), no amount in respect of the sale is includible as compensation in P's gross income for the year 2014. P's basis for determining gain or loss on the sale is $85. Because P sold the share for $75, P realized a loss of $10 on the sale that is treated as a long-term capital loss.
Under a nonqualified disposition, when the shares are purchased, the excess of the fair market value of the shares at the time of purchase over the purchase price (the spread) is taxed as ordinary income. Any additional gain or loss when the employee sells the shares is taxed as capital gain or loss.
Thank you @GeorgeM777 . The examples are very helpful. So in my case, there is a capital gain, which means it is possible that the '15% price difference multiplied by the number of stocks' could have been included in W2 box 1 as compensation. I will have to do some calculations to figure that out. As a general rule, is it up to the organization to decide whether to include it in box 1? Or is it normal practice for an org. to include that amount in box 1?
My clarifying question is, in example 1, if the stock was exercised and also if stock was sold (at a higher price) within 1 year of the grant date, and IF it was included in the W2 box 1, would the amount included in box 1 still follow the same calculation of '15% price difference multiplied by the number of stocks'? Per your earlier message this would fall under a non qualifying disposition and so would receive unfavorable tax treatment, but I don't know if this means that IF it was entered in W2 box 1, then it would follow the same calculation as if it was a qualifying disposition. Thanks again 🙂
Yes, employers are obligated to track the compensation element of an ESPP disposition (sale) and are also required to include the compensation element (income) in box 1 on the W-2. This requirement for employers is expressed in IRS Publication 15-B as follows:
The employer must report as income in box 1 of Form W-2 (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon a qualifying disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option.
Here is a link to the above: IRS Publication 15-B at Employee Stock Options
Regarding your second question, yes. In a disqualifying disposition, your employer should include in box 1 of the W-2, the discount element, or the spread, which is as you noted, the 15% discount amount multiplied by the number of shares purchased. If your sale was a qualifying disposition, calculating the amount to include in box 1 is a more involved because the employer is performing two different calculations and taking the lesser of the two. In a disqualifying disposition, calculating the income to include in box 1 involves just one calculation and just looks at the amount of the discount on the day the option to purchase shares is exercised.
While employers are required to track the amount of income to include in box 1 on the W-2, it makes sense to double-check that such amount was in fact included and further, that it is accurate.
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