withholding on stock options

[Guest benefitsmom]

Help, please. This isn't strictly an ESOP question, but I wasn't sure where to post it.

My daughter's company granted her stock options. (I haven't seen the plan or SPD, so I don't know whether these are NSOs or ISOs). She was granted 800 shares at a grant price of 9.275 and 300 at a grant price of 9.80. She quit her job late December to attend school, beginning this semester. She had to exercise by 1/20, so she did so on 1/18.

Yesterday she received "confirmation" from Smith Barney. The 800 shares were exercised at 22.005 (so the gain was $10,184; the 300 shares were exercised at 22.000 (so the gain was $3,660.) Smith Barney is withholding $4,909.65 and $1841.22, respectively. That's overall about 49%. Can that be correct? We expected the gain would be taxed as income, and we also expected her income this year would be pretty low because she is now a full time student. Yes, if they overwithheld she'll get it back, but she could really use the money now for school expenses.

Thanks for your help.

[Guest benefitsmom]

I now know a little bit more. Evidently Smith Barney had not received her W-9 when they did their calculations. Now they say that they will send a second check "soon" refunding the "extra" but they still expect to withhold ~39% (fed + Soc. Sec. plus 6% Kentucky). Are they really supposed to withhold for the state? This may be the only income she has this year, as a full-time student, so it still seems high. Any ideas?

Thanks

[Guest mjb]

Fed law requires withholding of sect 83 stock gains upon exercise of grant. The gain is taxed as wages subject to income and FICA tax as well as state taxation. Seems that the fed tax was withheld at supplemental rate of 25%.

[GBurns]

I wonder if she had checked the Box for Exempt from Withholding . Apparently she either did not or it is not applicable, so look at her copy or ask Smith Barney what was filled out. I would also question the deducting of FICA by them.

Make sure she files her tax returns next year so that she can claim her refund of the statutory withholding (probably no SS refund though). And yes, state taxes are usually withheld also.

mjb

Shouldn't the payment of FICA be an item for the eventual tax return?

[Guest benefitsmom]

Thank you both for your comments. I guess I was expecting something like 20% withholding.

She did not check the box that said "check only if you are subject to backup withholding."

So, apparently they will refund everything except 25% fed, 6% state, 7.65% FICA. I guess she can file for a (partial) refund next year if she doesn't earn much this year.

GBurns, what did you mean when you said "the payment of FICA was an event for the eventual tax return?"

Thanks for your help.