What Is Form 3921? A Guide for Startups Issuing ISOs

How do successful startups retain their employees and make them part of the company’s success? — that’s the essence of Incentive Stock Options (ISOs). Form 3921 is a document that tracks who’s exercising the ISO and how it’s shaping their connection to the company.

Incorporating Incentive Stock Options (ISOs) is a smart move for engaging employees and linking their success with the company’s. Think of Form 3921 as the paperwork ensuring everything stays compliant and in good financial tune during this employee benefits journey.

ISOs are like bonus opportunities companies give their employees to buy company stock at a good price. So, when employees exercise these options, Form 3921 ensures everything is clear and accurate, especially regarding taxes. It is an important document for both the employer and the employee.

What is Form 3921?

Form 3921 is important in managing ISO-related tax implications. It helps employees figure out how much money they should pay as Tax. They achieve this by showing the contrast between the price they paid for the company stock (exercise price) and its value on the day of purchase.

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.

Understanding Form 3921:

Form 3921 is important for reporting the transfer and sale of stock acquired through an Incentive Stock Option (ISO). Generally, there are three copies of the Form 3921:

Why do we need a Form 3921?

Under the Internal Revenue Code (IRC) Section 6039, companies must provide information to employees who have exercised ISOs during the calendar year. Here’s why companies need Form 3921:

• When an employee exercises incentive stock options, it can have tax implications. Form 3921 provides employees with the information they need to report the transaction on their income tax returns.
• Providing Form 3921 shows transparency on the part of the employer. It helps build trust between the employer and employees by ensuring they have the necessary information to understand the tax impact of their ISO exercises.
• ISOs can trigger the Alternative Minimum Tax (AMT) for employees. Form 3921 helps employees determine whether they need to pay AMT based on the exercise of incentive stock options.
• The IRS requires companies to report specific information regarding ISO exercises to ensure tax compliance. This includes details about the exercise price, the fair market value of the stock, and the exercise date.
• Form 3921 helps employees keep accurate records of their ISO exercises, which can be important for future tax planning and reporting.

How to file a form 3921?

It is important to submit Form 3921 to the IRS electronically (company with 250 forms or more) or through a paper form (less than 250 forms).

Here’s a step-by-step guide to completing Form 3921:

Step 1: You can obtain Form 3921 from the official IRS website (www.irs.gov) or your company’s HR department. The form comes with instructions, which you should also read carefully.

Step 2: Employee Information (Boxes 1–4)

• Box 1: Enter the employer’s name, address, and Taxpayer identification number (TIN).
• Box 2: Enter the employer’s name, address, and TIN.
• Box 3: Provide the employee’s name, address, and social security number (SSN).
• Box 4: Enter the date of the grant of the stock option.

Step 3: Exercise Information (Boxes 5–8)

• Box 5: Specify the exercise price per share.
• Box 6: Indicate the fair market value per share on the exercise date.
• Box 7: Enter the number of shares acquired through the exercise of the option.
• Box 8: Report any federal income tax withheld. If none, enter “0”.

Step 4: Additional Information (Boxes 9–10)

• Box 9: Indicate the stock transfer to another person. If not, mark the box “No.”
• 10: Report either the date of the option transfer or the date when the stock became transferable.

Step 5: Recipient Statements (Boxes 11–14)

• Box 11: Check the appropriate box to indicate whether the information in Box 4 is the correct recipient’s TIN.
• Box 12: Enter the recipient’s TIN. If the TIN is incorrect, correct it and check the box in Box 11.
• Box 13: Sign and date the form.
• Box 14: Provide the name and phone number of the contact person for the employer.

Step 6: Furnishing Copy B to the Employee

Step 7: Filing Copy A with the IRS.

As tax laws and forms may change, consult with a tax professional or the IRS instructions for the most accurate and up-to-date information.

What happens if we do not file Form 3921?

Issuing Incentive Stock Options (ISOs) and filing Form 3921 involve complex tax and regulatory considerations for startups. Here are some common mistakes or pitfalls to avoid, along with practical tips for compliance and accurate record-keeping:

Failure to Obtain Proper Approval:

• Mistake: Issuing ISOs without obtaining the necessary approvals from the board of directors and, if required, shareholders.
• Tip: Ensure the company’s stock option plan and relevant laws approve ISO grants. Document these approvals in board minutes.

Incorrect Exercise Price:

• Mistake: Setting the exercise price below the stock’s fair market value (FMV) on the grant date can result in tax consequences for employees.
• Tip: Conduct a thorough valuation of the company’s stock to determine the FMV. Set the exercise price at or above the FMV to avoid potential issues with the IRS.

Incomplete or Inaccurate Form 3921 Filing:

• Mistake: Failing to file Form 3921 with the IRS or providing inaccurate information.
• Tip: Develop a systematic process for filing Form 3921 on time and double-check all information for accuracy. Utilize specialized software or engage professional services to assist with the filing to avoid frequent reviews from the IRS.

Insufficient Record-Keeping:

• Mistake: Neglecting to maintain accurate and organized records related to ISO grants, exercises, and dispositions.
• Tip: Implement a robust record-keeping system to track all relevant details, including grant dates, exercise dates, and the disposition of shares. Retain records for the required statutory periods.

In addition to these, failing to file Form 3921 can have the below impact on the employer and employees.

• The IRS may impose penalties on the company for failing to file Form 3921 or for filing incomplete or inaccurate forms. Penalties can vary depending on the size of the company and the degree of lateness or error.
• Failure to file required forms may attract the attention of the IRS, potentially leading to increased scrutiny or frequent audits of the company’s overall tax compliance.
• A pattern of non-compliance with reporting requirements may negatively impact the company’s ability to administer stock option programs in the future. It could affect employee morale and retention.

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Considering the importance and the impact Form 3921 has, the companies must file it with great accuracy. Eqvista makes it simple by generating the form 3921 by logging in to our app.

We developed this special feature for our Premium users by thoroughly understanding ISO details, fair market reporting, and the rules for Form 3921 filing. Trust us to help you file Form 3921 correctly and make things easier. Contact us today for more details.