How does IRS Form 3921 work?

When a business grows and changes, it must comply with the IRS's many reporting obligations. Have your employees spent over a year working for your firm and benefitted from employee compensation through incentive stock options (ISO)? If so, you should file form 3921 and give your employees a copy to report unrealized gains or losses. Employers with previously exercised ISOs must provide this tax form to Internal Revenue Service (IRS) and a copy to their employees. You should know that late filing has specific due dates and penalties.

Who should file form 3921??

When a shareholder executes an incentive stock option (ISO), as an employer, you must submit IRS Form 3921. Employers must submit the form in the same year they exercise ISO, which must be submitted by the deadline. They should receive all the paperwork once the company has submitted it.

How does Form 3921 work?

With IRS Form 3921, you may prove to the government with information that your employees cashed in on your employer's stock options and report any actual or potential profits or losses as unrealized.? If they still own the stocks and haven't sold them to pocket the profit, the gain is considered "unrealized." Employees have an unrealized gain or loss if and only if they acquired something, like firm shares, at a specific price and its value has subsequently climbed or reduced.

You will file form 3921 and have to produce three copies. Copy A for IRS, Copy B for employee records, and Copy C for your company’s records. Pictures of Copy A and B are provided below, and companies would often retain a photocopy as Copy B.

When do you have to file form 3921?

A taxable event occurs when an ISO is initially exercised or sold after being exercised. When employees exercise incentive stock options (ISOs), employers must submit IRS Form 3921 to report the gain or loss caused by the disparity between the strike and exercise prices.

For determining the taxpayer's Alternative Minimum Tax liability, the amount by which the stock's fair market value (FMV) on the exercise date deviates from the strike price is added to the income as alternate minimum tax (AMT). But this is separate from the total when figuring up your tax liability.

Here are the deadlines for business taxes in 2023:

What do you need to file form 3921?

Form 3921 requires the following data, which may be retrieved from your human resources files and a stock ledger:

• Legal Name of your company
• It’s Address
• It’s FEIN or TIN
• Option Grant Date
• Option Exercise Date
• Employee’s Legal Name
• Employee’s SSN
• Employee’s Address
• Price to Exercise per Share
• FMV on Exercise Date
• Number of Transferred Shares?

As the employer is required to file, they may additionally need the following things:

• List of employees who used their ISOs in the last year.
• Transmitter control code (TCC) for your organization.
• Tax ID of employees.
• An account on the IRS system of Filing Information Returns Electronically (FIRE) for electronic filing.

How do you file Form 3921?

Form 3921 may be submitted either by mail (the deadline is February 28) or electronically (the deadline is March 31). If you’re filing for 250 or more employees, form 3921 must be completed electronically.

Online - If this is your first e-filing, you must submit Form 4419 digitally so the IRS can issue you a TCC and activate your FIRE account. You should start on this a month before the due date since it might take a few weeks. If you want to file electronically, you'll have to do it yourself since you can't hire a third party to do it for you. A non-employee cannot file Form 3921 without further authorization.

By Mail - You can only print off the forms, fill them out, and ship them in if you want to file by mail. Forms are processed by specialized IRS equipment that can only read IRS-issued paper. This document is available for order at Internal Revenue Service's website.

What are the consequences of not filing Form 3921 or filing it late?

There is a penalty for late filing, so be sure you have everything you need before the deadline. Failure to file or submit paperwork with significant mistakes will result in fines. Incorrect information provided to the IRS, such as a payee's tax identification number or last name, can result in a fine. The maximum fine goes up each year, and when the proper paperwork is submitted will determine the penalty amount you must pay.?

• If you file proper paperwork by 30 days past the deadline - You'll have to fork up $50 for each form (or $50 for each worker who cashed in on an ISO). The maximum annual penalty is $571,000, and for small businesses is $199,500.
• By August 1st and after 30 days past the deadline, the application cost is $110. There is a cap of $1,713,000 per year in fines; for small businesses, it is $571,000.
• If you file after August 1st or don’t file it at all - The cost per application is $280. The annual maximum fine is $3,426,000, or $1,142,000, for enterprises that qualify as small businesses.?

The IRS might levy the maximum penalty of $570 per form if it determines that your business willfully ignored the deadline. Here, regardless of the size of the company, the penalty will remain the same. Therefore, we highly recommend correctly tracking the company's employee stock options and shares accurately and filing 3921 with care.?