Reporting exercised 83(b) non-statutory stock options

At this time, Gusto only supports non-statutory stock options (NSOs). Use the information below to learn how to record these transactions in Gusto so it's reported on Form W-2 accurately.

What are 83(b) non-statutory stock options?

In addition to wages, salaries, and commissions, other forms of compensation such as stock options must be included in an employee’s gross income. A non-statutory stock option (also known as non-qualified stock options) gives employees an option to buy company stock at a fixed price for a certain period of time, with fewer conditions than statutory stock options. Reminder: Statutory stock options (such as Incentive Stock Options (ISOs) and Employee Stock Purchase Plan (ESPP)) are currently not supported in Gusto, please consult with a CPA or tax advisor on how to meet these requirements.

A non-statutory stock option under the Internal Revenue Code (IRC) provision of section 83(b) gives an employee the opportunity to elect current taxation to limit future taxes, when exercising non-statutory stock options. This is achieved by including in an employee’s gross income, the difference between the fair market value of the stock and the option’s exercise price. This difference (also known as the spread), is the amount that gets added to the employee’s gross income, is subject to income and employment tax, and is subsequently reported on the employee’s Form W-2.

Recording non-statutory stock options in Gusto

To ensure income from the exercise of non-statutory stock options gets reported accurately on the W-2, you must complete the following actions.

The spread or amount from the exercise of the non-statutory stock option can be added to the employee’s gross income in Gusto using one of two methods:

Preferred method: with a regular payroll

**Ensure the employee has enough wages on this payroll to cover the increased taxes for the stock option. If there aren’t enough funds to cover the taxes or any more regular payrolls to run in the year, you can use the alternative method below.

  1. Set up an Other (taxable) benefit for the employee. 
  2. Name it "Stock Options" or something similar for reporting purposes.
  3. Enter the taxable value of the stock as the Company Contribution.
  4. Set the Employee Deduction to $0.
  5. Run a regular payroll with this benefit active. 

Once the payroll has been run, remove the benefit from the employee’s profile so it isn't applied to any future payrolls.

Alternative method: with an off-cycle payroll

If your employee doesn't have enough wages to pay the taxes all at once, or there are no more regular payrolls to run in the year, you can process an off-cycle payroll. With this method, you, the employer, are covering the employee’s tax liability and will need to recoup these amounts from the employee outside of the payroll process. Proceed at your own discretion. 

  1. Enter the taxable value as gross wages in an off-cycle payroll.
  2. If the wages should be reported for a previous quarter, you’ll need to report it as a payroll processed outside of Gusto. 
  3. Set the payment method to check.
  4. Run the payroll and do not write a check.

When recouping any taxes you fronted on behalf of the employee, add a post-tax deduction on the employee's agreed-upon 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.

Reporting non-statutory stock options on Form W-2

Income from the exercise of non-statutory stock options, gets added to the W-2 boxes listed below.