Nonqualified Deferred Compensation on 1099-MISC from ESPP stock sale

[Gd2]

Hi folks,

We received a 1099-MISC with an amount in box 15 for Nonqualified Deferred Compensation. It results from the sale of stock under an Employee Stock Purchase Plan (ESPP) in 2022. When the stock was acquired, it was purchased at a 15% discount; the difference between this and the market value at time of purchase then becomes taxable when the stock is sold. Because the recipient was no longer at the company when the stock was sold, we received a 1099-MISC documenting this income (instead of it being on a W-2 or some other form).

TurboTax online just told me it doesn't support an entry in this box for 1099 MISC, and states I need to (a) print and file by mail, or (b) remove the form so I can submit online. 

Is there any workaround to get TurboTax to recognize this situation and file electronically?

[RobertB4444]

TurboTax considers your situation out-of-scope.  Here is what it says in the Out-of-scope article:

"Taxes not covered elsewhere 1. Form 1099-Misc and Non-Qualified Deferred Compensation: If your Form 1099-Misc has an amount in box 15b for nonqualified deferred compensation plans under code section 409A, see 16 IRS Publication 15-A for the calculation of the additional tax that must be reported on Form 1040."

In Publication 15-A the IRS has this to say about taxes on Nonqualified Deferred Compensation Plans-

"Section 83(i) election to defer income on equity grants (qualified stock).

An arrangement under which an employee may receive qualified stock (as defined in section 83(i)(2)) isn’t treated as an NQDC plan with respect to such employee solely because of such employee’s election, or ability to make an election, to defer recognition of income under section 83(i)."

You should read that whole section.

At any rate, I read that as this income doesn't require you to be subject to FUTA taxes so you should remove it from the 1099 and enter it under miscellaneous income with a description that says "NQDC ESPP" or something like that.  The amount will match your 1099 and should satisfy the IRS and it will go ahead through the program.

@Gd2 

[Gd2]

Thank you very much for the reply. Regardless of whether this came from a discount on stock purchased under an employee plan, I suspect the root issue is that TT doesn’t support any entries into box 15 (i.e. nonqualified deferred compensation) from whatever source. So we need to find another way to add it as you suggest.

It’s simple enough to remove it from the 1099, but I couldn’t determine what you meant by entering it under miscellaneous income. Where and how is this done? I don’t think turbotax online allows any manual entries into form 1040, and only allows income through form interviews (1099s, W2s etc). If there is another way to add this let me know. Maybe I have to print and file manually?

thanks again

[LindaS5247]

In general, the compensation associated with the sale of the stock acquire via the ESPP should not be reported to you on a 1099-MISC.  It is usually on your W-2 or possible depending on the circumstance a 1099-B.  Can you ask for a correction of your w-2?

To add "other" income to a return and manually enter a description you can try to do as described below.

Please follow the instructions below to report "other" income:

• Click Federal Taxes -> Wages & Income and scroll down to Less Common Income
• Go to the last selection, Miscellaneous Income and click Start
• Go to the last option, Other reportable income and click Start
• When it asks, "Any other reportable income?" say yes and then type in a description and the amount to report it on your tax return.

Click here for additional information on ESPP's.
 

Click here for information on Turbo Tax Support, you can connect with a Live Agent over the phone and share your screen.

[Gd2]

The income isn’t on a W2 because the recipient is no longer a company employee. She purchased the stock at a discount relative to fair market value while an employee years ago; but the way ESPP shares are taxed, this effective compensation isn’t reported until sale of the stock, which didn’t happen until 2022 and years after leaving the company. The company sent the 1099 misc documenting this, and we did ask them if this was the correct way to report this, and were assured several times in their view it was. 

I did exactly as you described and found the other taxable line and made the entry. Earlier I had tried another trick by entering the amount in box 3 instead of box 15 of 1099 misc since turbotax recognizes box 3. When doing this I had to make one dubious claim (Income was not obtained for the purpose of profit), but it did work and both methods above gave me exactly the same refund amount for state and federal. So looks like I have two ways out of this, just need to decide if I risk getting a query from the IRS about a missing 1099, or hope they don’t catch an entry in the wrong box if I do include the 1099…

Thanks again everyone for the help!

[AbrahamT]

You are going to be fine as long as that income shows up on your tax return no matter where you inputted the entry. From what you are telling me, since both methods gave you the same refund amount, you're good to go. As long as you keep a record of this 1099 MISC  for backup in case you run into an issue down the road so it could be explained.

All the best.