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1099-NEC Non-employee Stock Options - where/how do I link it to Sch. D/8949

DeveraC
Level 3

I have a client who was a nonemployee director of a bank. He is no longer there and exercised/cashed in his stock options with the bank. He originally received a W2 with the options, but when we informed the bank as a reminder he was never an employee with them, the reversed the W2 and then issued him a 1099-NEC with the profit of the stock options ($282k.)

How to link the 1099- NEC to the Sch. D/8949, as the only links are for Sch. C, Sch. F, Other Income, or Wages on the 1040? He was not issued a 1099-B, but I have the information to enter the sale of the stock. 

Surely this amount doesn't go to a Sch C??? 

 

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24 Replies 24
dkh
Level 12

Link it to the Sched C  then enter an offsetting expense for same amount  with explanation income is stock options being reported on Schedule D       Then proceed with your Sch D/8949

Ignore this - I obviously didnt know how this should be reported  - sorry

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Just-Lisa-Now-
Level 15
Level 15
so its all free money?

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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DeveraC
Level 3

Think this would be okay and not raise a red flag?

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Just-Lisa-Now-
Level 15
Level 15
Ive never seen this, but thinking it through.....well hes got to pay the tax on the value of the options, just like if it were wages on a W2, right? So it would go on Sch C, then hed use that amount as the basis for the stock sale.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
DeveraC
Level 3

But, you don't pay SS/Medicare on stock options, right? If I only used his cost basis as the expenses, he would have to pay those taxes on his profit. That doesn't seem right.

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dkh
Level 12

Maybe it should have been on a W2 then it would flow through as federal taxable but not subject to SE taxes

DeveraC
Level 3

But he was never an employee for the company. Everything I've read on the IRS pubs stated it should have been reported on the 1099-NEC, but it doesn't tell me how to report that on his return. The amount on his 1099-NEC is the proceeds from the stock options which I need to report on D/8949.

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dkh
Level 12

link the 1099NEC to Other Income line    - client would pay tax as required  but no SE tax

DeveraC
Level 3

So then don't write the full amount off in the Sch C as you stated before? Oh my goodness this is so confusing. 

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Just-Lisa-Now-
Level 15
Level 15
Hes gotta pay taxes on the value, shouldnt be subject to SE taxes though, so linking the NEC to Other Income would seem like the simplest way to do this.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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DeveraC
Level 3

Right - I agree that he has to pay taxes on the value of the profits. But he has a huge carryforward of loss from previous stocks. We were hoping to be able to offset the stock options with these losses. So, would it be okay for me to use stock options expenses on the Sch. C. and then report the sale on the Schedule D showing the profit? Then his long-term losses would offset the profit?

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sjrcpa
Level 15

The options he received, exercised and sold are taxable compensation equal to the excess of the value over the amount he paid for them, if anything..

I don't see why it wouldn't be subject to SE tax. If he was an employee it would be W-2 compensation subject to SS & Medicare tax.

His capital gain or loss equals the sale price minus the taxable compensation minus what he paid.


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DeveraC
Level 3

But he was never an employee so it's not the same, right? Could I report it as Sch C., then 100% expense stating as reported on Sch. D. Then, report the full amount as profit on the 8949/Sch. D? He has a huge carry forward loss in capital gains which would help offset the profit. 

Or no, this isnt the way?

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sjrcpa
Level 15

His director fees were subject to SE tax. This is part of his director compensation.

There is no expense to put on Sch C.

Schedule D will have a small gain or loss.


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DeveraC
Level 3

So these stock options have to be reported on sch c with 100% subject to FICA???

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sjrcpa
Level 15

As far as  I know, yes.


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Just-Lisa-Now-
Level 15
Level 15

what did the W2 look like?  Were they subject to SS/Mdcr on the W2?


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
DeveraC
Level 3

No, but they reversed the w2 when they realized he was not an employee.

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rbynaker
Level 11

Obviously we don't have any details so we can't "do the math" on this.  But I completely agree with this line of thinking.  The directors fees were subject to SE tax, this is just a different form of compensation so it should also be subject to SE tax.

In my career I've seen enough equity compensation screwed up that I don't take anyone's word for it.  Get the documents, follow the math.  Look at each transaction.  Options were granted, how many what strike price?  Options were exercised, were there broker fees, was this cashless or did he pay the strike price?  Stock was sold, was it a same-day sale, were there broker fees?  Follow your share counts through the process.

DeveraC
Level 3

So I get the part for schedule D. What do I link the $282k from the 1099-nec to? To sch. C w/ all the amount taxable for Fica/fed/state or to Other Income,

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sjrcpa
Level 15

I'd do Sch C.


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DeveraC
Level 3

Crap. My client is not going to be happy at all. 

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qbteachmt
Level 15

Is this what you need:

https://www.irs.gov/taxtopics/tc427

 

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DeveraC
Level 3

I had read this, but it reads to me as if he was an employee, which he was not.

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