Received stock options as employee, sold them as contractor. Are they subject to W2 or 1099 SE taxes?

[ConfusedBot]

Hello,

I received stock options when I was hired full-time employee at a company. I worked there full-time for three years while stock vested then I converted to contractor for about 5 months and the stocks also vested. I sold the stock options but the company refused to make it W2 payment but instead said they will issue 1099-MISC (1099-NEC now I believe). 

Am I responsible for the SE taxes for the sale of stock ? Or should the company issue W2 ?

If W-2 is the answer and company continue to refuse, can I ask them to issue 1099-MISC as Other income instead ? Or can I just file Schedule C as Other income if they also refuse  ? 

Thanks 

[Critter]

The 1099-nec starts with the 2020 tax year ... it will not be used for the 2019 tax filings being done next month. 

Now the stock options are given either in lieu of some compensation for the work being done  or  as a bonus.  Either way if you choose to be treated as a contractor then all the compensation you are paid (including the stock options) are reported as income by your business.  When you sell the stock you will have a basis in to equal to the compensation that was taxed on your return.  A 409a should be issued to you ... see this article: https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/paying-contractors-stock.aspx

[DanielV01]

What type of stock options were they?  And when did they vest?  Did any of them vest while you were an employee, or did they all vest after you became a contractor?  Did you receive any of the stock as compensation as a contractor?  These questions help shape the answer.

[ConfusedBot]

Hi @DanielV01  @Critter ,

Thanks so much for response for the clarification about the form. They were given as part of my full-time job offer (ISO). I worked there for three years full time and the options were granted at the beginning of my full-time employment and vested most of it during that time. When I quit I continued to work as contractor for few months until they find replacement, the options continued to vest. When I sold them, company refused to treat my options as W2

I don't understand why I should be treated as contractor and pay self-employment even though my options were granted to me and vested most of the time for W2 job, isn't like they asking me to retroactively pay self-employment tax for the whole time I worked as full time and relief the company of their W2 payment for salary they paid me? 

Thanks

[ConfusedBot]

Just to clarify why I think employer should pay this as W2:I was granted the options as part of W2 salary, and I earned  about 90% of this stock while I was full-time employee just like I earned my cash wage. So it feels to me the company is trying to relief itself from W2 withholding using the excuse that I worked as a contractor for 5 months out of the 41 months I worked for them. At least to be fair they should pay W2 for the share of stocks that vested for as full-time employee and I should pay SE taxes for stock vested as contractor.

[Critter]

Personally I would put this back on them ... have them show you the regulations that require them to treat the options that way. Make them prove their method is correct.

[ConfusedBot]

Thanks @Critter , I will try that ask them to show why they did that. 

[DanielV01]

And if they still don't cooperate, you may have one more option available.  You can file Form SS-8, which is an application with the IRS to have those option payouts to be classified as wages.  If the IRS determines in your favor, they will go back to the company and ask for 1/2 of the SS and Medicare that employers are required to pay on behalf of their employees.  You would still be required to pay the other 1/2, as well as Federal and State taxes, because these taxes were not withheld at the source.

Because it is paid compensation for services, though, the options are liable to Social Security and Medicare tax.  The question is whether you are only liable for half of the tax as an employee or the whole amount as self-employed.  Your reasoning sounds solid, but you may need to prove your case with the IRS.

For additional information, please see this website:  About Form SS-8 | IRS.gov (Click on link, and you can click on (HTML) on the page to get specific instructions about how the Form is used).