Year-End Processes for Equity Compensation Reporting

End of the year processes are a mandatory part of administering any employee stock plan.

If you are a company controller or assistant controller in charge of managing equity compensation alongside your other job duties, end of the year processes can be daunting.

If you do not yet have a dedicated equity compensation manager, it's also worth considering an external managed service provider to help with this administration.

In this article, we dive into the various end of the year processes you need to be lining up to ensure you are on track with due dates and requirements.

Reconciling the Stock Plan and Payroll Systems

The system you use for administering your employee stock plans and the system you use for payroll are separate. However, since stock plan transactions have tax implications, it's vital that you reconcile the data from these systems to ensure that you comply with regulations and tax withholding requirements.

This end of the year process is either done manually or through automated stock plan management, depending on the software systems you use.

For example, if you rely on a spreadsheet, expect some manual work. On the other hand, equity management software systems can make this process much more straightforward.

Disqualifying Disposition Survey

Certain types of stock options such as incentive stock options are subject to additional IRC regulations. In the case of incentive stock options, there are tax advantages for the employee and company.

However, there are also holding requirements, two years from the date of grant or one year from the date of exercise, to realize these advantages.

If an employee sells, transfers, or exchanges the stock prior to fulfilling the holding requirements, the income generally needs to be reported on the employee’s W2 and is also a tax deduction for the company.

This is considered a disqualifying disposition and can be reported via disqualifying disposition survey by the end of the year by the employee or through reporting from the stock plan management system in order for the company to receive the available tax deduction.

RELATED: The Best Equity Management Software

1099 Reporting for Board of Directors and Other Non-Employees

Board members, advisors, consultants, and other vendors or contractors who received 1099 income from your organization are also subject to end of the year reporting processes. You need to report this income for the calendar year on the 1099s to ensure compliance.

6039 Reporting for ISOs and ESPP Transactions

Section 6039 reporting is a complicated process and is required by law if there are any ESPP or ISO transactions during the calendar year. This entails providing a statement to each participant and reporting to the IRS these equity transactions for the calendar year.

This reporting assists your participants with the information they need for proper filing of their tax returns, which includes splitting ordinary income calculations from capital gain or loss reporting associated with those transactions. You must provide your stock plan participants with this reporting no later than January 31st of the year following their execution of the transaction, and the IRS filing is due by March 31st.

Non-US Payroll Reporting

If your company has overseas employees, then you must also comply with reporting requirements for any non-us payroll, security, tax obligations or other country-specific requirements.

Because regulations differ from country to country, you'll need to individualize this reporting based on the exact location of each overseas employee and their local tax regulations.

Section 16 Reporting for Public Companies

If your company is public, then your company will have mandatory Section 16 regulatory filing responsibilities. Section 16 is a rule within the Securities Exchange Act of 1934 that specifies responsibilities for officers, directors, and principal stockholders.

Anyone who owns more than 10% of the company's stock or other equity class is subject to Section 16. The purpose of Section 16 is to provide transparency and reduce fraud in financial dealings when it comes to “insiders” within the company.

If your company is subject to Section 16 filing requirements, it is imperative that these are handled within your end of the year reporting processes to ensure that all equity transactions have been reported through the year as required. If not, then the company still needs to take action in order to comply with the SEC reporting requirements even if they are late.

Proxy Statement

Proxy statements are another reporting requirement for public companies. These statements contain information that the Securities Exchange Commission requires public companies to provide shareholders for the purpose of making informed decisions.

Proxy statements include crucial information the shareholders need to assess the qualifications and compensation of the company's management team and board of directors. This includes salary, bonuses, benefits (including equity compensation), and perks among other information.

Proxy statements must be filed before shareholder meetings to ensure the shareholders have all the relevant data they need to make votes with regard to the election of directors, among other key decisions.

10-K

A 10-K is an annual report filed by publicly traded companies regarding their financial performance. It contains much more detail than a standard annual shareholder report.

Information required in the 10-K includes organizational structure, company history, financial statements, earnings per share, and other relevant data. The 10-K is useful for investors to make educated decisions regarding their stake in the company.

In terms of equity compensation plans, the 10K must include any equity-based expenses and stock plan-based expense compensation.

Simplifying Your End of The Year Processes

Even for smaller companies that have equity compensation plans in place, end of the year processes can be incredibly complex.

Even if you have a dedicated equity compensation administrator, manual end of the year processing is challenging.

If you do not have a dedicated EC administrator in your organization, this challenge is even greater.

This is where CompIntelligence comes in. Our equity compensation and stock plan administration services are designed to meet your specific organizational needs with regards to everything that goes into proper administration of employee stock plans.

This includes short term assistance for processes such as end of the year reporting, as well as long term assistance with their managed stock plan service model.

Regardless of your current size or future growth, we can scale the services to ensure a seamless administration and reporting process for your specific situation.

Through our managed services, we can often reduce your overall equity administration costs and ensure you are compliant with all relevant regulatory requirements and tax obligations.

With the largest network of experienced consultants and administrators, we can bring feet on the ground or remote assistance to meet your needs.

To discover how our team can improve your stock plan administration processes, contact CompIntelligence today.