State, Local Taxes on Stock Options Vary Among States


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State and local taxation of stock options can vary among states depending on the state’s withholding rules for nonresidents, an employment tax director said May 18.

States generally follow federal rules on taxation of equity, said Amie Nidoy, an employment tax director at PricewaterhouseCoopers LLP. However, compensation may be taxed differently by states depending on when elements of the compensation were earned and a given state’s nonresident withholding rules, she said. 

At the federal level, stock options may be taxed when qualified options are sold, or when other options are exercised, granted to, or vested in the employee, Nidoy said at the American Payroll Association’s 36th Congress, held at National Harbor, Md.

State Rules

Equity is generally subject to state tax at the same time it is subject to federal tax, Nidoy said. However, some states tax stock options differently, she said. 

For example, Pennsylvania has its own classes of income for state and local tax purposes, and the state taxes qualified and nonqualifed stock options when exercised instead of when sold, said Kerri McKenna, CPP, CPA, a director in PricewaterhouseCooper’s People and Organization practice.

For nonresidents, California taxes the entire value of nonqualified stock options and performance share units on the date the options are exercised and vested, respectively, McKenna said. The state has a supplemental withholding rate of 10.23 percent only for bonuses and equity-based compensation, separate from the 6.6 percent rate for other supplemental wages, she said.

States with different rules include North Carolina, which taxes all equity awards for nonresidents to the extent that the employees worked in the state at the time the award was granted, McKenna said. 

Illinois also taxes nonqualified stock options for nonresidents based on the amount of work performed in the state, Nidoy said. In addition, 14 states have local income taxes, and localities may have their own rules and reporting requirements, she said.

A city may not tax equity or may have different rules for nonresidents, McKenna said. 

Employers also should consider states’ employee withholding requirements for unemployment insurance or disability insurance, Nidoy said. Alaska, New Jersey, and Pennsylvania require withholding for unemployment insurance, while California, Hawaii, New Jersey, New York, and Rhode Island require withholding for disability insurance, she said.

Federal Legislation

The new federal tax law (Pub. L. 115-97) primarily led states to update their Internal Revenue Code conformity dates and withholding tables, McKenna said. Idaho, Utah, and Kentucky updated their supplemental withholding rates this year, she said.

Congressional efforts to pass the Mobile Workforce State Simplification Act (H.R. 1393) continue, Nidoy said. H.R. 1393 was passed by the House June 20, 2017, and was sent to the Senate Finance Committee, where it received a hearing. 

The bill would focus on a 30-day threshold for services performed in a state by nonresidents, below which states would be limited in their taxation of nonresidents, she said.