Startup Corporate Tax Returns Employee Options

Managing corporate tax returns can be especially complex for venture-funded startups, particularly when employee stock options are in the mix. Here’s an overview of how employee options impact startup taxes, the required reporting, and how to stay compliant with IRS regulations.

How Employee Stock Options Impact Startup Taxes

When an employee (or contractor) exercises stock options – whether Incentive Stock Options (ISOs) or Non-Qualified Options (NQOs/NSOs) – the transaction can create both tax reporting and tax liability, even though the company receives cash for the exercised shares. Some important considerations:

  • The exercise of stock options is considered a compensation event because it may provide a financial benefit to the employee, which the IRS tracks closely.
  • Accurate and timely reporting of exercised options is required to avoid costly penalties.

Essential IRS Reporting for Employee Stock Options

For ISOs

  • Companies must file Form 3921 for each employee who exercises an ISO in the previous tax year.
  • The deadline to provide employees with Form 3921 (Copy B) is January 31. If filing by mail, send Form 3921 (Copy A) to the IRS by February 28; if filing electronically, by March 31.
  • Late filings carry steep penalties.

For NQOs/NSOs

  • For employees, the spread (difference between fair market value and strike price) on the exercise date is reported as W-2 income (Box 1, and, if relevant, Box 3, Box 5, and Box 12, Code V).
  • For contractors, exercise income is reported on a 1099-MISC.

General Corporate Filings

  • Besides option-related forms, startups must file typical payroll forms (W-2s for employees, 1099s for non-corporate contractors) on time.
  • C-corp federal corporate tax returns (Form 1120) are due April 15.

Best Practices for Reporting Employee Option Exercises

  1. Track exercises diligently. Use your cap table and equity management platform (we like Carta) to track stock option grants and exercises accurately.
  2. Generate exercise reports. Download exercise history for the relevant tax year. Services like Carta provide “Exercised and Settled” option reports for this purpose (see below for detailed Carta instructions).
  3. Share reports with your CPA. Provide these reports well ahead of tax deadlines! That keeps you compliant and minimizes CPA billable hours.
  4. Get professional advice. Each startup’s situation is unique. Consult your tax professional, especially regarding the alternative minimum tax (AMT) for ISOs and how exercises impact bookkeeping and tax reporting.

Getting Your Exercise History Report

To obtain an exercise history report from Carta, follow these detailed steps:

  1. Log In to Carta
    • Access your Carta account using your credentials. Make sure you have at least View, Company editor, or Full Access permissions.
  2. Navigate to Reports
    • From your company dashboard, go to the main menu and select the Reporting or Company Reports section.
  3. Locate the Exercised and Settled Report
    • Find the “Exercised and Settled Report”. This report contains detailed information about all exercised and settled options, including secondary sales.
    • If looking for other equity or transaction history, you may also see options such as Option Grant Reports or Option Transaction History.
  4. Set Your Report Parameters
    • Usually you can filter the report by date range, equity plan, or transaction type (e.g., exercise, settlement). Select the relevant tax year (e.g., January 1-December 31).
  5. Run and Export the Report
    • Click on the report to generate it.
    • Once generated, you will have the option to export/download the report – typically as a CSV file. Sometimes, you may receive a download link via email if exporting large datasets.
  6. Check the Report for Key Fields
    • Your report will typically include: stakeholder name, email, grant ID, grant date, exercise date, number of options exercised, exercise price, type of transaction, and payment details.
    • If necessary, enable editing in Excel to see all columns.
  7. Share with Your CPA
    • Save the CSV and provide it directly to your tax preparer or upload it to your document management system as needed.

Note:

  • If you don’t see the report, check your permissions or consult your company’s Carta admin.
  • This process can also be used to export comprehensive transaction histories or incentive pool histories, depending on your reporting needs.

Taking Action to Stay Compliant

Complying with IRS reporting requirements for option exercises is critical for growing startups – not just to avoid penalties but to keep investors and employees confident in your operations. Kruze Consulting specializes in helping venture-funded startups manage these complex filings, leverage leading cloud tools, and stay ahead of tax deadlines. If you need help with startup corporate tax returns or employee option compliance, reach out to our team of experts today!