Tax season often forces business owners to function as tax experts on top of their daily responsibilities, especially when extra forms come into play. If your company offers employees stock options, one of those extra forms is Form 3921.
Form 3921 is an informational IRS tax document that companies are required to file whenever one of their employees exercises an Incentive Stock Option (ISO). This document informs the IRS exactly which of your stockholders acquired their shares using an ISO and therefore received tax benefits.
As an employer, it is your responsibility to fill out form 3921 for every employee who exercises their ISO. You must give one copy of the ISO forms to the employee, and file one copy with the IRS. Filing correctly and on time protects your business from steep fines for failing to file or penalties for serious mistakes in the filing.
This article will explain what IRS Form 3921 is, why it matters, and how to file it. We’ll also explain exactly how ISOs work.
Why IRS Form 3921 Matters
Form 3921 contains important information about employee stock options and stock prices. When your employees exercise their ISOs, they receive significant tax benefits, or ISO tax treatment. The IRS tracks that information. Receiving Form 3921 makes it easier for the IRS to ascertain whether your employees are correctly reporting their taxable income following the transfer of stock.
Form 3921 filing is also important from the standpoint of your business. Failure to fill out the form may result in penalties — up to more than a million dollars in fines in the most extreme cases.
The IRS fines businesses $60 per form at minimum for filing late. Fines are capped at different rates, but can go into the millions. If the IRS determines that a business is intentionally disregarding the form, the fee is uncapped.
Key Components Of Form 3921
Form 3921 instructions are fairly complex. You will need to fill out three copies of Form 3921. The first copy (Copy A) goes to the employee who exercised their ISO. The second copy (Copy B) goes to your company records. The third and final copy (Copy C) must be filed with the IRS.
Form 3921 contains the following information:
- The name and TIN of the employee
- The date the option was given to the employee
- The date the employee exercised their stock option
- The price per share, or option price
- The fair market value of the stock at the time of exercise
- The number of shares transferred to the employee
Who Needs To File Form 3921?
Form 3921 generally applies to publicly traded companies. Any company whose employees have exercised ISO in the previous calendar year must file Form 3921. You must file for each instance of ISO exercised by an employee or former employee.
However, you do not need to file Form 3921 if a non-resident employee who is not a U.S. citizen exercises an ISO. If you don't need to provide a W-2 for the employee, then you generally will not need to file a 3921.
What Are Incentive Stock Options (ISOs)?
An incentive stock option is a benefit that you usually offer as a reward to high-achieving employees, typically high-level management, although you may give it to any highly-valued employee.
An ISO gives the employee the right to buy shares of stock in the company at a discounted rate. In many cases, the ISO also confers tax breaks on the profit from the stocks. ISO taxation usually follows the capital gains rate instead of the ordinary income rate.
Employees who receive an ISO do not necessarily need to purchase the stock right away. They can buy their discounted shares at any time within a fixed period, even if they are no longer working for the company.
Benefits Of ISOs For Startups
Issuing your employees ISOs can build loyalty, inspire confidence, and encourage your team to work harder to build up the business. When employees see themselves as shareholders, they are likely to feel deeply invested in the business. They’ll work hard to ensure that it thrives.
You can offer ISOs as year-end bonuses or as rewards for excellent employees. If your business is operating on a lean budget, then offering ISOs to your employees can be a cost-effective way of demonstrating your gratitude for their contributions.
How To File Form 3921
If your employee exercised their stock option at some point in 2023, you’ll need to provide them with the form by January 31, 2024. You'll need their TIN, full name, and address, as well as your company's transmitter control code (TCC).
You must file with the IRS by February 28 if you are filing a paper form by mail. If you’re filing electronically, you must file your return forms by April 1. If you are filing more than 10 forms, you must do so electronically. You will need an account with the Filing Information Returns Electronically (FIRE) system.
Remember to start the process well in advance as it can be time-consuming and late filing comes with costs.
Get Expert Assistance With Your Startup's Taxes
As a new year begins, it's time to start thinking about Form 3921, along with your other startup taxes. But if you’re like most startup owners, you have a lot on your plate. Filing taxes can be overwhelming, especially when you have to fill out additional forms on top of trying to save as much as possible.
Finance and tax professionals can offer strategic insights and help you with all your financial needs - including tricky tax forms. Business accounting software powered by artificial intelligence, plus an expert team behind you, can get you through this filing season so that you can focus on growing your business.
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