Are Foreign Employer Stock Options Taxed in the U.S.?

Are Foreign Employer Stocks Options Taxed and Reported?

Foreign Employer Stocks Options

With the globalization of the US job market, and more and more US Persons working for overseas employers, it has become much more prevalent for US taxpayers to receive stock options from a foreign employer. Employer stock options come in all different shapes and sizes. For example, the taxpayer may receive restricted stock units, a restricted stock award, or other types of incentive stock options or awards (ISO/ISAs). Since most foreign employers do not operate the same as US employers — in that, they do not withhold an issue W-2s and deposit quarterly withholding — the question becomes, how does a US Person properly report and pay tax on foreign employer stock options. Let’s walk through the basics.

Taxation of Foreign Stock Options

Let’s first start with the taxation rules.

Worldwide Income

The first thing to keep in mind is that the United States follows a worldwide income tax system. Therefore, even if a US Person works for a foreign employer, they are still subject to US tax on their worldwide income. This fact remains true, even if the US person employee works overseas and earns all the income from foreign sources (although Foreign Tax Credits and Foreign Earned Income Exclusion may apply to reduce the US tax implications).

Does the Foreign Employer Comply with US Withholding and Tax?

Even if an employer is ‘foreign’, they may also have operations within the United States. In other words, it is not uncommon for a U.S. company to have a foreign branch, in which the foreign branch is still operating as part of the U.S. company sufficient so that the US company properly complies with U.S. tax issues reporting and withholding for the domestic and foreign branches.

When did the Shares Vest?

An important aspect of employer stock options is when those options may have vested. There are several different types of options and awards, and it is important to determine if the shares vested when the employment began — and taxes were handled at that moment — or did the shares/options vest over a vesting period of usually three to five years and then taxes are due at that time. In a US employer situation, when the options vest — typically the company will withhold a certain amount of tax through the shares themselves and it will appear on the W-2 so that there is not much that the Taxpayer has to do except report it on their tax return. Whereas, with a foreign employer, withholding may not have occurred and so taxes would presumably be due at the time it vested.

Was a Section 83(b) Election Made

In some circumstances, the US taxpayer employee may have had the opportunity to make a section 83(b) election so that they pay tax up-front, with the hopes that the shares increase in value and the overall tax liability is reduced (Ordinary Income vs Capital Gains). Taxpayers should check with their employer to see if any election was made.

Foreign Stock Option Reporting Reporting

In addition to the tax implications, there are also reporting requirements as well. U.S. Taxpayers are required to report foreign accounts and assets such as stock and stock accounts when they meet the threshold reporting requirements. The mere fact that the shares/options may have commenced through foreign employment does not modify the fact that the reporting is still required.

Many different types of IRS international reporting forms may be required depending on the type of ownership and category of assets, but the two main types of reporting requirements for US persons with foreign accounts and similar assets are the FBAR and Form 8938 (FATCA).

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.