The IRS has shortened the time in which employers must deposit payroll taxes related to certain stock-settled awards issued to employees, in order to be eligible for an administrative waiver of late-deposit penalties.  Through a non-publicized change to its Internal Revenue Manual, the IRS has shortened the applicable deadline for depositing owed and accumulated employment taxes related to stock-settled awards from three business days after exercise (T+3) to two business days after exercise (T+2), while also expanding the administrative waiver’s applicability to additional types of awards.  This change occurred a mere eight days after General Legal Advice Memorandum, GLAM 2020-004, which we discussed earlier this month, was issued to IRS Examination explaining the timing of income rules and the deposit requirements applicable to certain stock-settled awards, as well as the history of the long-standing administrative waiver dating from 2003.

The GLAM discusses the 2017 amendment by the Securities and Exchange Commission (“SEC”) to its securities transaction rule, which shortened the standard settlement cycle period for most broker-dealer transaction from T+3 to T+2.  Because the GLAM also discussed the IRS’s 2003 administrative waiver of late deposit penalties and even stated that its discussion “does not affect [its] application,” practitioners believed that the administrative waiver set forth in Internal Revenue Manual (IRM) 20.1.4.26.2 would continue to be available provided that the settlement date was within three business days of the exercise date.  In other words, under the 2003 administrative waiver, which, by its terms, applies only to nonqualified stock options, employment tax deposits would be treated as timely if deposited within one day of settlement, so long as settlement occurred within three days of the exercise date.

Eight days after the date of GLAM 2020-004, the IRS revised the conditions for applying the administrative waiver of late deposit penalties in an internal procedural update to IRM 20.1.4.26.2.  This as-yet unpublished IRM update indicates the following changes:

  • SARs and RSUs. The administrative waiver of late deposit penalties will now explicitly apply to stock-settled SARs and RSUs in addition to stock options.  As we noted in our article on GLAM 2020-004, it was previously unclear whether the administrative waiver would apply to equity awards other than stock options.
  • T+2. Under the revised administrative waiver, deposits will be treated as timely if deposited within one day of settlement (assuming the $100,000 next-day deposit rule applies), so long as settlement occurs within two days of (i) the exercise date for a stock option or stock-settled SAR or, (ii) the payment initiation date for a stock-settled RSU.  As we mentioned in our prior article, because most stock options for large employers would have been settled within the T+2 window, the shorter period in the administrative waiver will not affect the deposit timing requirements for those settlements.  Cash-settled RSUs remain subject to employment taxes when paid by the employer and received by the employee.  Nor does the waiver apply to qualified stock options, such as employee stock purchase plans or incentive stock options, which are generally not subject to employment taxes upon exercise.

Given the short period of time between the issuance of GLAM 2020-004 and the directive to update the IRM, it is unclear why the IRS did not preview the pending change to the administrative waiver in the GLAM.  Regardless of the reasoning behind its approach, the IRS has shortened the period for applying the administrative waiver, and employers should ensure that they are depositing employment taxes owed within the new deadline, i.e., T+2.  As of the date of this posting, IRM  20.1.4.26.2 has not been revised to reflect this update.

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Photo of James Damon James Damon

James Damon is an associate in Covington’s Washington, DC office, where he practices with the firm’s Employee Benefits and Executive Compensation Practice Group.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.

Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.