Microsoft fighting tax on stock-option benefits
The companies are protesting regulations the IRS issued last fall that would force them to collect Social Security and Medicare taxes from stock-option incentives and employee stock-purchase plans starting next year.
"It will be an enormous administrative burden, and we're certainly concerned that businesses will eliminate these programs," said Rosemary Becchi, vice president and tax counsel for Citigroup, which offers its employees a stock-purchase program and administers similar plans for 300 other firms through its Salomon Smith Barney subsidiary.
The congressional Joint Committee on Taxation estimates the tax would cost workers and their employers $23 billion over the next decade.
Becchi will be joined by representatives from Microsoft, Marriott, CIENA, Texas Instruments and other companies arguing against the tax at an IRS hearing today. The corporations want the IRS to drop the proposal or at least delay it so they can lobby Congress to exempt options from payroll taxes.
The IRS maintains the 30-year-old law clearly says the difference between the employee price and fair market value is subject to payroll tax. Opponents say that's not what Congress intended.
Incentive stock options and employee stock-purchase plans have tax incentives that encourage owners to hold the stock for at least a year. They differ from ordinary employee stock options, which are usually exercised and sold on the same day and are taxed as ordinary income. Companies get a tax deduction and must track when their employees exercise ordinary options.
The proposed regulations would reverse 30 years of tax-free treatment of the spread between the fair market value and the strike price of incentive stock options and shares purchased as part of a qualified employee-purchase plan. The options and shares are typically offered at a 15 percent discount from fair market value.
The payroll tax includes a 12.4 percent tax used to fund Social Security and a 2.9 percent tax used to fund Medicare, with both portions split evenly between employer and employee.
The IRS may have been prompted to review the law after the use of incentive stock options and employee stock-purchase plans grew dramatically during the 1990s, especially in the tech sector, said Corey Rosen, executive director of the National Center for Employee Ownership.
About 15.7 million people participate in 4,000 company-sponsored stock-purchase plans, according to Rosen's group.
The House of Representatives has passed legislation that would spare workers from paying payroll taxes for exercising incentive stock options and purchasing company stock at a discount. The Senate is likely to include the measure in a broader package of pension reforms in June, said James Delaplane Jr., vice president of retirement policy for the American Benefits Council.
He said if the IRS lets stand the rules today, Congress is likely to step in. Lawmakers, he said, won't have the stomach for such a tax increase in an election year.