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Reporting exercised 83(b) non-statutory stock options

What are 83(b) options?

The 83(b) election is a provision under the Internal Revenue Code (IRC) which gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.

The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

Reporting non-statutory stock options

Non-statutory stock options, also known as non-qualified stock options, that were exercised need to be reported on the W-2 (Box 12 code V), and taxes need to be paid on the options. This total amount needs to be entered into Gusto one time.

  • If the options were not exercised they do not need to be run through payroll. 

Keep in mind: it’s up to you to determine what value to enter for taxation. If it's a stock grant, the entire amount is taxable. If it's a stock option that was exercised, the difference between the fair market value and the strike price is taxable. We recommend speaking with a CPA or tax advisor who can help determine the appropriate amount to enter in Gusto.

Preferred method of reporting: Report the stock options benefit with a regular payroll

  1. Set up an Other (taxable) benefit for the employee. 
    • Name it "Stock Options" or something similar for reporting purposes.
  2. Enter the taxable value of the stock as the Company Contribution.
  3. Set the Employee Deduction to $0.
  4. Run a Regular Payroll with this benefit active. 
    • Make sure the employee is earning enough in this payroll to cover the taxes for the stock. If there aren’t enough funds to cover the taxes or no more regular payroll to run in the year, you can use the alternative method below.
  5. Once the payroll has been run, remove the benefit from the employee’s profile so it isn't applied to any other payrolls.

Alternative method: Report the stock options as gross earnings with an off-cycle, check payroll

If your employee doesn't have enough funds to pay the taxes all at once, or there are no more regular payrolls to run in the year, you can  run an off-cycle, check payroll and collect the taxes from the employee later. 

Keep in mind: in this scenario, you the employer are paying for the tax amount, and proceeding is at your own discretion. 

  1. Enter in the stock amount as gross wages in an off-cycle payroll.
  2. Set the payment method to check.
  3. Run the payroll and do not write a check.
  4. To recoup any taxes you fronted on behalf of the employee, add a post-tax deduction on the employee's next payroll(s) for the tax amount.
    • Make sure to communicate the upcoming deduction(s) with the employee to ensure it won't be a surprise.

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