If I exercised a NSO (Non-qualified Stock Option) with a previous employer, is it correct that I received a 1099-MISC?

[kenneth-a-yu]

When I exercised the NSOs with my past employer, there was positive income. As a result, they issued me a 1099-MISC. This 1099-MISC is specified as "Box 7: Nonemployee compensation". 

On the 1099-MISC is says: "Box 7 : ... You received this form instead of Form W-2 because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax..."

According to this http://thestartuplawblog.com/nonqualified-stock-options-tax-withholding/,

"it doesn’t matter if an employee left employment years ago. It doesn’t matter if the employee is no longer in your payroll system. If the option was granted in the context of employment, then you have to withhold income and employment tax withholding, even if the optionee is no longer an employee at the time of exercise. The character of the payment is wages.

It is important to get this right, because if you do not withhold the income and employment taxes from the employee, the company can become liable for those amounts to the IRS."

Note: I am running into immense hardship trying to file this exercise event via a 1099-MISC. After adding my 1099-MISC, the Turbotax software leads to questions that do not make sense for an Exercise event. Please help!

[AmandaR1]

You are correct. Enter the amount from your 1099-misc, in the W-2 section box 1, 3 and 5, and leave all withholding blank. On the following screen titled, Do any of the uncommon situations apply? you can select the box to indicate that you did not receive a W-2. 

Follow the prompts and explain what happened. The benefit of this is that the IRS will go after the company for your other half of social security and medicare taxes. 

What you might want to do before doing this, is tell your ex-employer that you are going to do this. It is best to get it fixed without the IRS involvement (personally). That way they know it's coming and they may be more inclined to fix it now. 

[cspinelive]

I left a company and exercised my NSOs months later just before they were to expire. I did a “cashless” exercise where I essentially sold shares that I exercised back to the company in order to cover the cost of the exercise event. I did the same to cover the cost of taxes that I assume they were required to collect from me at the time.  Example. I had 10,000 options to exercise. I exercised them all but used 3000 to cover the cost to buy the shares and 1000 shares to cover the taxes. I’m left with 6000 shares when it is all said and done.  The company uses Carta to handle their options. The stock is not publicly traded. 

What form should I look for and who will send it? I got the W2 from the company but it did not include any of this income or the taxes I paid. Should I expect a 1099 from Carta? Will it include these amounts? How do I report this in TurboTax?

[MarilynG1]

When you actually sell the shares, you will get a Form 1099-B to report the sale.  

If you exercise ISO's and do not sell any the stock acquired by 12/31 of the year of exercise then you need to enter the exercise using the "ISO Exercise and Hold" interview.  Your "source" document for this should be Form 3921 provided to you by your employer.

If you sell some or all of the stock on the same day as your exercise (for taxes) then you MIGHT NOT get a 1099-B because brokers are not required to issue 1099-B's for a "same day" sale, (though they are supposed to give you a statement with the same information required by the 1099). 

This article on Incentive Stock Options has several different scenarios to help you with tax implications.