Non-Employee Stock Options

[DeveraC]

A client was distributed stock options from a bank he was an investor, but not an employee. The bank sent him a W2 form with box 1 and box 2 as the same amount for the stock options. I know this isn't right, but what form should they have issued the stock options on since he was not an employee? I was thinking 1099-B, but I know options are handled differently.

FYI - I do business bookkeeping for him for a separate business and prepare both the corporate and personal tax returns for him. I'm trying to tell him the correct form he needs to tell the bank that issued them instead of the W2.

[Just-Lisa-Now-]

Did he sell what they gave him? If so, Id think a 1099B would be arriving soon.

[DeveraC]

Not exactly. He was asked to join the board of a bank 18 years ago. At that time he bought stock as a non-employee, merely a member of the board. The bank was sold in late 2019 and they issued the stock options in January 2020. He was never an employee in the 18 years, just a member of the board. So why would they issue him a W2 where box 1 (wages) was the amount of tax profit and in box 2 (federal taxes withheld) they put the same amount? 

I've told him to go back to the bank and see if actual taxes were withheld (which I do not think they were.) I told him I thought everything should come on a 1099B, but it doesn't seem that is the case at this time.

AHHHHHHH!!!

[Just-Lisa-Now-]

yea, that's a weird situation that's out of my league sorry!

The W2 with wages and fed w/h the same amount seems really odd, I think the program is going to holler about the withholding being so high and not allow E filing either.

[BobKamman]

Does he own stock in the new bank?  Did he receive any money when the bank was sold?  Was this a merger, or is Big Bank now just a stockholder (maybe the only one) in Little Bank?  If he was on the Board, that means he was a Director, and any compensation should be reported on a 1099.  Sounds like some records from 18 years ago are missing.  However, he may not remember that along with buying stock, he got an option for more shares. 

This is from the IRS audit manual on such stuff:

 Former employees’ compensation should be reported on Form W-2. A reconciliation should be requested for  some of the larger exercises to the employee’s reported option income in Box 1and Box 12, code V of Form W-2.  Extra steps must be taken to reconcile deductions to the proper year for companies with a fiscal year end.  Discrepancies in the reconciliations may indicate an income or employment tax issue.  

If the options are offered to directors, ascertain whether a Form 1099 was issued. This option income should be reported on the director’s individual tax return (e.g. Schedule C or on line 21, Other Income), along with self-employment tax upon exercise or other disposition.

https://www.irs.gov/businesses/corporations/equity-stock-based-compensation-audit-techniques-guide

[Ephesians3-14]

Wait - you said Box 1 (Wages) and Box 2 (Federal tax withheld) are the same? How can that be? Was that a typo in your original post?

In this situation, I've usually seen a W-2 issued, so I don't think that's a big deal. Just report it as such.

He'll also get a 1099-B, so be sure to adjust his cost basis for the "spread" between the FMV on the date exercised/sold (I assume he sold the stock) and the option price.

[DeveraC]

It wasn't a typo. That is what struck me as weird. So, I have him going back to the payroll company of the bank to see if taxes were actually withheld and if so, if that amount is correct. The whole thing is weird to me. I know when someone is an employee they typically get a W2 and 1099-B, but with him never being an employee but just a board member, I thought it might be handled differently. 

[DeveraC]

He does not own stock in the new bank. When the bank was sold, they new bank did not give them that option and anyone who had stock in the old bank had to cash in their options. FYI, it was a little bank purchased by a slightly bigger, yet smaller, bank.

He was considered a director, which is why I expected it to be on a 1099 as he has never received any type of compensation from the bank. He does have the paperwork from originally purchasing the stock 18 years ago, but there was no other paperwork for him being a director (it was a very tiny bank.) 

I'm pretty sure it was supposed to be issued on the 1099, thus the reason why I've asked him to go back to the payroll company who handled the issuing of the W2. I think the same amounts in wages and federal taxes withheld are incorrect, so he's checking on that as well.

[BobKamman]

@DeveraC 

To repeat, "Did he receive any money when the bank was sold?"  

If federal withholding on the W-2 equals wages paid, did they also withhold FICA taxes?  Did he have to write them a check for those?

I hope you don't have too much money in that bank.