Form 3921 and Form 3922 – Everything you should know

Equity compensation in privately held companies is a widely used tool to incentivize and reward key employees by granting them ownership of the company. Employee stock ownership plans (ESOPs), employee stock purchase plans (ESPPs), and restricted stock awards are some of the most common forms of stock-based compensation. But, did you know that there are various considerations that must be taken into account when you consider granting stock options? Form 3921 and Form 3922 are two Forms that Form an integral part of the Internal Revenue Code, which governs employees’ stock options. This article serves to offer a comprehensive overview of Form 3921 and Form 3922.

What is Form 3921?

Form 3921 is a tax form that is required to be filed with the Internal Revenue Service (IRS) when an employee exercises ISOs or Incentive Stock Options (ISOs). ISOs are stock options that are granted to employees with the purpose of providing a portion of ownership stake. When an ISO is exercised, the company must report the transaction on Form 3921. Exercising ISOs refers to a process whereby an employee purchases stock at a predetermined price after a particular period of time. As a result, Form 3921 helps the IRS to determine appropriate taxes that are due on an employee’s exercise of ISOs.

Who must file Form 3921?

When it comes to the filing of Form 3921, option holders who exercised their ISOs in the previous calendar year must file Form 3921. To better understand this, let’s consider an example.

For instance, an employee named Adam was granted options in 2015. In 2020, Adam exercised his options by purchasing a certain number of shares at a specific price. Now, in 2021, Adam is required to file Form 3921.

How to file Form 3921?

It is very important to note that Form 3921 must be submitted to the Internal Revenue Service either electronically or through a paper Form. So, how to file Form 3921? To begin with, Form 3921 can be downloaded from the IRS’s official website and can be filed and mailed or transferred electronically. Here are the details you need to know about Form 3921 filing:

• The transferor’s name, address, and Taxpayer Identification Number (TIN) should be entered in the left-hand corner of the Form. Further, the employee name, TIN, address, and account number must be filed correctly.
• Transaction-related details including option grant date, exercise date and price, the fair market value of the shares and other applicable details must be filed.

Exemption for Form 3921

In some cases, an exemption can be obtained that relieves the employer from the requirement of filing Form 3921. In order to qualify for such an exemption, an employee who is a non-resident alien and for option holder where the corporation is not required to provide a Form W-2, Wage and Tax Statement, the reporting of the exercise of stock options is exempt. While it is applicable for any calendar year within the duration of the grant and exercising.

What is Form 3922?

For Form 3922, it is filed when transfer of stock is made to an employee under the terms of an employee stock purchase plan (ESPP). ESPPs are arrangements whereby employees are given the option to purchase company stock at a discounted price. Form 3922 must be submitted to the Internal Revenue Service (IRS). It is basically for informational purposes rather than for reporting purposes. The main purpose of Form 3922 is to provide the IRS with all the necessary details pertaining to a stock transfer.

Who must file Form 3922?

Form 3922 is an IRS Form that is used to report the transfer of stock acquired pursuant to an employee stock purchase plan (ESPP). In order for a transfer of stock to be considered a qualified purchase, the legal title of the stock must be transferred as a result of the exercise of an ESPP. Share certificates can be used as an identification method for proving the transfer of stocks. As a result, when the transfer of shares takes place under ESPP, Form 3922 must be submitted to the IRS.

How to file Form 3922?

Now you might wonder how to file Form 3922? Similarly, Form 3922 can be filed manually as well as electronically to the IRS. Form 3922 must be submitted for each transfer of stock acquired pursuant to an ESPP that took place. As a result, the following required details must be submitted:

• Name, address, and federal identification number of the corporation that grants the ESPP as well as the name, address, TIN, and account number of the employee who acquired the stock, must be submitted.
• ESPP grant date, the exercise date and price, the number of shares transferred, the fair market value of the stock on the grant date, the fair market value of the share on the exercise date, and the date on which the legal title is transferred are some of the details that must be filed.

Exemption for Form 3922

Similar to Form 3921, certain exemptions can be obtained from the requirement of filing Form 3922. The initial transfer of legal ownership of a share of stock by a non-resident alien employee and for whom the corporation is not required to furnish a Form W-2, Wage and Tax Statement, Form 3922 is exempt. This is limited to any calendar year where the grant and exercise period occurred.

Required Information in Form 3921

In order to make sure that Form 3921 is properly filled out, certain information must be included in the Form. Below mentioned are the information that must be included in Form 3921:

• Statement to transferee – In this section, a statement addressed to the person whose name appears on Form 3921 must be provided. This statement identifies the stock option recipient as the transferee of the securities from the company. The statement must include detailed information regarding the stock options that are exercised.
• Employee name, address, and TIN – This part of the Form must contain information relating to the employee, including the name, address, and taxpayer identification number (TIN). It allows the IRS to receive the information it needs in order to process the Form, thus avoiding delays.
• Account number – In the case of multiple accounts, a separate account number must be included in the statement section of the person for which the Form is filed. In fact, IRS recommends that the account number should be separate for all Form 3921 for a particular employee.

Required Information in Form 3922

The information that is required to be included in Form 3922 is similar to that in Form 3921. It includes the following:

• Statements to transferors – The statement in this section of Form 3922 indicates the person to whom the covered securities are transferred. It states that such securities are transferred as a result of the exercise of an option under an ESPP. Hence, the statement must be clearly addressed to the employee who exercises the option.
• Name, address and TIN of recipient – This part of the Form is identifying information related to the recipient. The recipient in this regard, is the employee to whom the stock was transferred. As such, the recipient’s name, address, and taxpayer identification number must be indicated in Form 3922.
• Account number – When there are multiple accounts being reported with the same recipient, a separate account number must be indicated. As a matter of fact, IRS suggests that the account numbers should be separate for all Form 3922 reports in particular for a particular recipient.

Due date of Form 3921/3922

Now that we have covered the information that must be included in Form 3921 and Form 3922, it is important to understand the due dates for such Forms. In the case of Copy B, ISOs or ESPPs exercised in 2022, will be required to file Form 3921 and Form 3922 by 31st January 2023. On the other hand, under Copy A, 28th February 2023 is the due date for ISOs or ESPPs exercised in 2022. When the Forms are filled online, 31st March 2023 is the last date for filing Copy A.

Penalties for not filing Form 3921 and 3922

Failure to file both Form 3921 and Form 3922 by the due date will result in penalty charges. The penalties for failure to file Form 3921 and Form 3922 are the same. Depending on the time period after the deadline, the penalties differ. The following list provides a breakdown of penalty charges:

• Within 30 days after the deadline – The employer must pay $50 for each Form (or $50 per employee that used an ISO) within 30 days of the deadline. As a result, the fine would be $2,500 ($50 * 50) if you had 40 exercises during the previous year. The maximum fine is $547,000 annually or $191,000 in the case of small firms.
• Before 1st August and after 30 days of the deadline – In the event that an employer fails to file the Forms within 30 days of the deadline, however, before 1st August, the employer will have to pay a fine of $100 for each Form. As a result, the maximum fine is $547,000 for small enterprises or $1,641,000 annually.
• After 1st August or never filed in the right order – The fine for all employers who failed to file the relevant Forms after 1st August or never filed in the right order is $270 per Form. Thus, the maximum fine is $3,282,500 annually or $1,094,000 in the case of small firms.

Need help with business filings for your company?

Now that you know Form 3921 vs Form 3922, including a detailed explanation, you might have noticed that there is a lot to consider while filling out these Forms. It is in this regard that we recommend getting professional help. Remember, the IRS is not lenient when it comes to penalizing those who fail to abide by their guidelines. With this in mind, Eqvista offers an affordable and convenient way of filing Forms 3291/3922. Our experts are well-versed in the rules and regulations of the IRS and will ensure that your company’s Form 3921/ Form 3922 is filled out correctly. Get in touch today with Eqvista and discover how easy it is to get your company’s Form 3921/3922 filed!