The SEC issued a change to the rule that accelerates securities transaction settlements. The change is called the “T+1” rule, reducing the amount of time during which an employer is required to calculate, withhold, and deposit employment taxes on certain types of wages paid (nonqualified stock options or restricted stock units).
The IRS regulates the payment of stock-based compensation. Federal employment tax deposit rules apply to the employee when settlement occurs, or when the cash is transferred to the employee’s account.
The T+2 rule, which is currently in effect, establishes that the time between the trade and settlement dates was two business days. The shortened time is one business day (T+1 rule). The IRS can impose penalties on any employers who fail to deposit employment taxes on time, which can be between 2% and 10%. A stiffer penalty of 15% may apply if an employer is notified of the deficiency and still fails to pay.
Employers offering equity compensation to employees, including restricted stock units and nonqualified stock options, should become familiar with the change and make any necessary adjustments.
This article is informational and does not constitute legal or financial advice. Consult with an employment lawyer or accountant for additional clarification on how these changes impact your company
