How do I Report the Withholding on my Sale of Stock Options

May, 23 2025 by Glynis Miller, CPA, MST

Many organizations will offer their employees, and sometimes very strategic business stakeholders, the opportunity to own stock in the company as a form of compensation. Since the stock options are considered compensation, which is treated as income, they are generally subject to the same general rules related to other compensation. In other words, the compensation will generally be subject to employment taxes, such as Social Security and Medicare taxes, as well as ordinary income taxes. Please note that there are various forms of stock plans, and each one has its own set of rules related to the timing of the recognition of income and the tax treatment of capital gains from the sale of stock, whether long-term or short-term. However, no matter the tax treatment of the compensation or capital gains or losses, any withholding the company is required to make on the sale of the stock options is reported to the employee or stakeholder on specific tax forms. Understanding where these withholdings are reported will help you understand how to report the withholdings on your income tax return and what other documents you may need to aid in accurate reporting.

It is important to remember that the U.S. tax system, in general, operates on a pay-as-you-go concept. To facilitate this concept, employers and third-party payors are often required to hold back a portion of the compensation or payments owed to you as a withholding toward the payment of any potential taxes you might owe. The source of the payment can determine whether there is both a federal and state requirement for a withholding tax to be held back by the payment issuer. Also, the nature of the payment can determine what form is used to report the withholding to you and the taxing agency.
 

Who can have stock options, and what documents do they receive?

When an employee of the company receives stock options, they should expect to receive information related to the activity surrounding the stock options from their employer. However, they should also expect information from the brokerage firm that holds the actual stock portfolio. The broker will generally supply the employee with monthly statements throughout the year. At the end of the year, the broker is required to report the sales transactions related to the stock options for the year to the employee and the tax agency on Form 1099-B. If no sales occurred within the year, the brokerage firm does not have to issue Form 1099-B. The employer will issue the employee a W-2 form each year, depending on the tax treatment of the specific stock plan, and will determine what information is contained in the W-2.

While stock options are most often given to employees, as noted above, they are sometimes given to strategic stakeholders. A strategic stakeholder may be a supplier of a critical resource for a business; thus, they may offer the supplier company stock options as an incentive to maintain the business relationship and ensure greater success for both. Unlike an employee, if a supplier receives stock options from a company, they will not receive a W-2 form. Instead, a supplier would receive Form 1099-MISC and Form 1099-B, depending on the transactions that take place within the year.
 

How do I know if a payer reported withholding to the IRS or my state?

If a payor is required to withhold funds from an amount owed to you, they will be required to provide you with the necessary tax documentation. Tax documentation is generally prepared after the end of the tax year, with the exact amount that was withheld. Copies of the forms are sent to both the taxpayer and the taxing authority. A couple of very common forms are W-2 forms and 1099 forms. No matter which form is used, the reported amount will appear in a box that will be clearly labeled as “federal income tax withheld” or “state income tax withheld.”

A key point to remember is that many of the tax documents issued nowadays are done in a digital format. What this means is that you will only receive a digital copy of the form, and nothing will be mailed to you. Therefore, it is important to log in to the various accounts you have and retrieve your digital forms when getting ready to prepare your tax return. The forms can either be printed or downloaded and saved on your computer and should be retained for as long as the tax return can be audited. In general, the IRS has three years to audit a return after it has been filed;, however, some documents may need to be retained longer because the tax benefits might extend for many years to come.

In some cases, you may receive additional documentation that can help you reconcile what was owed to you in total versus what you received as a result of the company withholding a portion for tax purposes. It is important to note that while these documents should be retained as they provide very important information, they may not be the official tax documents you should use for the reporting of your withholdings.
 

Which stock option plans have withholding, and what form is it reported on?

Each stock option has its own characteristics, and, thus, reporting is not the same. However, if there is withholding for an employee, it is the employer who receives the funds from the brokerage firm for the amount withheld from your stock transactions, and then your employer submits those funds to the proper taxing authority. Thus, the employer accounts for the withholding on your W-2 along with all of your withholding for the year from your other wages and earnings. Here are the types of stock options and whether there is withholding reported on W-2:

• Restricted Stock Units (RSUs) – Withholding reported on the W-2
• Restricted Stock Awards (RSAs) – Withholding reported on the W-2
• Performance Units or Shares – Withholding reported on the W-2
• Stock Options (nonqualified) – Withholding reported on the W-2
• Stock Options (qualified) – There is no tax withholding to report.
• Incentive stock options (qualified) – There is no tax withholding to report.
• Stock appreciation rights – Withholding reported on the W-2
• Nonqualified employee stock purchase plan (ESPP) – Withholding reported on the W-2
• Qualified employee stock purchase plan (ESPP) – There is no withholding to report.

The most important thing to note is that with stock options, you will receive a lot of documents from your employer and the brokerage firm that holds your stock. Those documents have information indicating details of what you paid for the stock, if anything, the type of stock option, and which taxes were withheld. However, as noted above, the tax withholding reported on your tax return for the sale of your stock options should only be based on the information included in your W-2 if you are an employee of the company. Or, in the case of a non-employee who received information regarding your stock option sales, your withholding, if any, would be indicated directly on Form 1099.

It is important to only report the withholding listed directly on the W-2 or 1099 from the employer. If you also report the amount listed in the other documents (from the brokerage firm), you will be overstating your withholdings. When withholding is overstated in a tax return in this manner, it is a duplication of an amount that will result in a notice from the IRS or state. The duplicated amount can result in you underpaying your taxes or receiving a refund you are not entitled to receive. Unfortunately, these errors are not always caught immediately, but when they are, the unpaid taxes must still be paid. Or, if you receive a refund that you should not have received, you will need to pay it back. In these situations, there will be additional money owed for penalties and interest.