AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Taxation of NSO issued and exercised for self-employed consultant
Posted by: Patrick Goeckner, January 18, 2017 12:48AM
I have a self employed client who was issued stock options of a company that was purchased by a larger publicly traded company. The client was forced to exercise their options upon the merger and is being issued a 1099MISC for the proceeds.

I realize the proceeds are considered ordinary income for tax purpose, is the income also subject to SE tax and required to be reported on their Schedule C or is there another place to record such income?

Are there any other considerations to be aware of?

Re: Taxation of NSO issued and exercised for self-employed consultant
Posted by: Kaye Thomas, January 18, 2017 01:04AM
It appears these are compensatory options and that would make the income reportable on Schedule C and subject to self-employment income. Technically, the amount taxable as ordinary income is the excess of the stock value over the exercise price on the date of exercise, which may not exactly match the amount of proceeds, depending on details of the transaction. If there was an actual exercise of the option and sale of shares, as opposed to the company paying out a cash settlement, it's also necessary to report the stock sale, although this usually has little or no effect on tax liability, because the stock basis includes the amount reported as income, which normally brings the basis up to a figure that matches, or nearly matches, the sale proceeds.

Kaye Thomas
Fairmark.com

Re: Taxation of NSO issued and exercised for self-employed consultant
Posted by: Patrick Goeckner, January 18, 2017 03:28PM
Thank you Kaye for a clear and concise explanation. This is what I assumed but wanted verification



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