Publication 15-B - Employer'S Tax Guide To Fringe Benefits - 2012 Page 12
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33You can choose to ignore test (2) if the employee was not
For more information about employee stock options,
also in the top 20% of employees when ranked by pay for
see sections 421, 422, and 423 of the Internal Revenue
the preceding year.
Code and their related regulations.
Employee Stock Options
Employer-Provided Cell Phones
There are three kinds of stock options—incentive stock
The value of an employer-provided cell phone, provided
options, employee stock purchase plan options, and non-
primarily for noncompensatory business reasons, is ex-
statutory (nonqualified) stock options.
cludable from an employee’s income as a working condi-
Wages for social security, Medicare, and federal unem-
tion fringe benefit. Personal use of an employer-provided
ployment taxes (FUTA) do not include remuneration result-
cell phone, provided primarily for noncompensatory busi-
ing from the exercise, after October 22, 2004, of an
ness reasons, is excludable from an employee’s income as
incentive stock option or under an employee stock
a de minimis fringe benefit. For the rules relating to these
purchase plan option, or from any disposition of stock
types of benefits, see
De Minimis (Minimal)
Benefits, ear-
acquired by exercising such an option. The IRS will not
lier in this section, and
Working Condition
Benefits, later in
apply these taxes to an exercise before October 23, 2004,
this section.
of an incentive stock option or an employee stock
purchase plan option or to a disposition of stock acquired
Noncompensatory business purposes. You provide a
by such exercise.
cell phone primarily for noncompensatory business pur-
Additionally, federal income tax withholding is not re-
poses if there are substantial business reasons for provid-
quired on the income resulting from a disqualifying disposi-
ing the cell phone. Examples of substantial business
tion of stock acquired by the exercise after October 22,
reasons include the employer’s:
2004, of an incentive stock option or under an employee
•
Need to contact the employee at all times for
stock purchase plan option, or on income equal to the
work-related emergencies,
discount portion of stock acquired by the exercise, after
October 22, 2004, of an employee stock purchase plan
•
Requirement that the employee be available to
option resulting from any disposition of the stock. The IRS
speak with clients at times when the employee is
will not apply federal income tax withholding upon the
away from the office, and
disposition of stock acquired by the exercise, before Octo-
•
ber 23, 2004, of an incentive stock option or an employee
Need to speak with clients located in other time
stock purchase plan option. However, the employer must
zones at times outside the employee’s normal work-
report as income in box 1 of Form W-2, (a) the discount
day.
portion of stock acquired by the exercise of an employee
stock purchase plan option upon disposition of the stock,
Cell phones provided to promote goodwill, boost
and (b) the spread (between the exercise price and the fair
morale, or attract prospective employees. You cannot
market value of the stock at the time of exercise) upon a
exclude from an employee’s wages the value of a cell
disqualifying disposition of stock acquired by the exercise
phone provided to promote good will of an employee, to
of an incentive stock option or an employee stock
attract a prospective employee, or as a means of providing
purchase plan option.
additional compensation to an employee.
An employer must report the excess of the fair market
value of stock received upon exercise of a nonstatutory
Additional information. For additional information on the
stock option over the amount paid for the stock option on
tax treatment of employer-provided cell phones, see No-
Form W-2 in boxes 1, 3 (up to the social security wage
tice 2011-72, 2011-38 I.RB. 407, available at
base), 5, and in box 12 using the code “V.” See Regula-
tions section 1.83-7.
An employee who transfers his or her interest in non-
Group-Term Life Insurance Coverage
statutory stock options to the employee’s former spouse
incident to a divorce is not required to include an amount in
This exclusion applies to life insurance coverage that
gross income upon the transfer. The former spouse, rather
meets all the following conditions.
than the employee, is required to include an amount in
•
It provides a general death benefit that is not in-
gross income when the former spouse exercises the stock
cluded in income.
options. See Revenue Ruling 2002-22 and Revenue Rul-
ing 2004-60 for details. You can find Revenue Ruling
•
You provide it to a group of employees. See
The
2002-22 on page 849 of Internal Revenue Bulletin 2002-19
10-employee
rule, later.
at See Revenue
•
It provides an amount of insurance to each em-
Ruling 2004-60, 2004-24 I.R.B. 1051, available at
ployee based on a formula that prevents individual
Page 12
Publication 15-B (2012)
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