1. California Payroll Conference
September 11 and 12, 2014
Understanding Stock Administration Related to PAYROLL
Suzie Bentley, CPP, NVIDIA Corp.
Christine Zwerling, CEP, Stock & Options Solutions

2. Agenda Overview – Common equity awards and their life cycles
Employee Stock Purchase Plans (ESPP)
Stock Options
Stock Appreciation Rights
Restricted Stock
Tips on streamlining processes
Working together!
Appendix of other interesting info…

3. A day in the life of payroll…
Global / Sub / Other Payrolls
Human Resources
External Service Provider
Stock Admin
Tax Dept
IRS, State and Local Agencies
Employees

4. A day in the life of stock admin…
Securities Exchange Commission
Legal / Compliance
Human Resources
External Service Provider
Payroll – U.S. & Global
Tax Dept
Finance – A/P and Reporting
IRS, State and Local Agencies
Employees

5. ESPP – What is it? Purchase of Company Stock at a discount
Each pay period, participants contribute a percentage of their pay (calculated before tax, deducted after tax)
At the end of the purchase period, contributions are used to purchase company stock at a discount
Definitions:
Grant Date / Offering Period Start Date / Purchase Period Start / Enrollment Date
Exercise Price, Strike Price, Grant Price, Purchase Price, FMV
Exercise / Purchase
Dispositions
Qualified / Disqualified
Section 423 ESPP / Non-423
Example:
First Day (enrollment date) January 1; FMV $10/share
Last Day (purchase date) June 30; FMV $12/share
Purchase Price $8.50

6. ESPP – Enrollment / Contributions
Plan documents govern the program and define:
What pay is eligible
Which participants are eligible to participate
How calculated
Gross pay
Deducted from net pay
Contribution limits
Excess contribution distribution - refunded or rolled forward
Deadlines for enrollment, changes, withdrawals, refunds

7. ESPP – Changes Employment changes Contribution rate changes
Termination – refund
Ineligibility – refund
Withdrawal – refund
Contribution rate changes
Process for managing changes
All ESPP changes to be made through stock administrator
Track # of changes (i.e., one decrease during period, etc.)
Effective date for changes
Contribution limits
Flat dollar contribution limit?
$25k limit

8. ESPP - Purchase Contribution file to Stock Admin (Timing is critical!)
Per pay period or Once at end of purchase period
Process for updating contributions before purchase - Adjustments
Multiple payroll groups sending contributions – global program
Currency conversion
No reporting or tax in U.S. at purchase! Yeah!
Carry forwards
Refunded
Remain in the plan until the next purchase
Who tracks this?
What if a participant terminates participation in the plan?
Example
$1,000 contributions and $8.50 purchase price
117 shares purchased and $5.50 remaining contributions (carry forward)

9. ESPP –Dispositions (Sales/Gifts)
Reporting for 423 plans (qualified and disqualified)
How often - monthly, quarterly, annually?
Compensation income recognized on sale of shares in U.S.
Statutory holding period not met
recognize income equal to the spread in the stock when the shares were purchased
Statutory holding period met - recognize lesser of
1) the discount offered under the plan as computed on the participant's offering date, or
2) the actual gain on the sale (Sale Price minus Purchase Price)
Terminated employee sales
ESPP sale income exempt from FICA/FUTA under the American Jobs Creation Act of 2004

10. ESPP – W-2 Reporting Form W-2 reporting: Just for fun!
Box 1 (Wages, tips, and other compensation)
Box 16 (State wages, tips, etc.), if applicable
Box 18 (Local wages, tips, etc.), if applicable
Just for fun!
Regulation § (a)(1) requires Form W-2 even if those payments are not subject to withholding:
Disqualified Disbursements (also receive Corporate Tax Credit)
Qualified Disbursements
IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits

11. 2014 W-2

12. Options/SARs – What are they?
Stock Option
Contractual right to purchase shares of the company's stock
A specified number
A specified price (the exercise price) and
A specified period of time(generally between five and 10 years)
Value only if stock appreciates
Non Qualified (NQ) or Qualified (ISO – Incentive Stock Option)
Stock Appreciation Right (SAR)
Only pays out the appreciation in the stock price

13. Options/SARs – What are they?
Definitions
Grant / Award
Grant Date, Date Of Grant, Award Date
Exercise Price, Strike Price, Option Price, Grant Price, Purchase Price, FMV
Vest
Exercise / Purchase
Cash
Cashless / Same-Day Sale
Disposition / Sale
Qualified or Disqualified
Section 421 ISO

14. Options/SARs – Vesting
Payroll usually doesn’t have to do anything!
UNLESS…
Exercise of unvested
Granted at a discount
Look out for 409A!

15. Options/SARs – Exercise
NQ (non qualified) or SAR
Recognize compensation when purchase shares
Market Value minus Exercise price
Form W-2 reporting:
Box 1 (Wages, tips, and other compensation)
Box 3 (Social Security wages), if applicable
Box 5 (Medicare wages and tips).
Box 12, with code V
Box 16 (State wages, tips, etc.)
Box 18 (Local wages, tips, etc.)
Suzie Base frequency on timing of your events or at least annually for U.S. tax rate changes
NOTE: Taxes withheld should be aggregated with employees’ other withholdings for the year and reported in Boxes 2, 4, 6, 17, and 19, as appropriate

16. 2014 W-2 tax reporting

17. Stock Options – Exercise (ISOs)
Nothing!
UNLESS…
Pennsylvania
Then income and state income taxes due upon exercise

18. Stock Options – Disposition (ISOs)
Subject to tax for regular tax purposes at sale (disposition)
Meet holding periods (qualified)
No reporting or withholding obligations at sale
Do not meet the required statutory holding periods (disqualified)
The compensation income recognized is equal to the lesser of:
1) the spread at exercise (difference between the market value of the stock at that time and the exercise price, or
2) the actual gain realized on the sale (the difference between the sale price and the exercise price)
Suzie Base frequency on timing of your events or at least annually for U.S. tax rate changes

19. Timely Tax Deposits
IRS requires tax receivables in excess of $100,000 per day to be deposited within one business day.
All receipts combined from all sources
Stock admin primary sources are stock option exercises and restricted stock vestings
Deposit date of T+1 for non broker stock option exercises
Deposit date of T+4 for stock option transactions via broker
Deposit date of V+1 for RSUs and RSAs
Calendar “known” transactions
Stock administration knows when RSU vest
Immediate notification for stock option exercises
Failsafe process to confirm/deny daily or periodic activity
Suzie

20. Restricted Stock – What is it?
Restricted Stock (RSA) / Restricted stock units (RSUs)
Outright grant of company stock to employees or other service providers
Known as “Free Shares”
No cost to grantee
“Restricted"
Subject to a vesting schedule
Time Based or
Performance goals
May be governed by other limits on transfers or sales imposed by the company
Suzie
Barb – talk about deferrals

21. Restricted Stock - Grant
Payroll usually doesn’t have to do anything!
UNLESS…
IRC Section 83(b) election filed, then taxed immediately.
Only available for RSA

22. Restricted Stock Unit- Vesting
Compensation income reported at vest
market value
FIT / FICA / FUTA taxable at vest
unless the RSU is subject to deferral
Not reported in Box 12
May voluntarily report income in Box 14 (Other)

23. Restricted Stock - Timely Tax Deposits
IRS requires tax receivables in excess of $100,000 per day to be deposited within one business day.
All receipts combined from all sources
Stock admin primary sources are stock option exercises and restricted stock vestings
Deposit date of T+1 for non broker stock option exercises
Deposit date of T+4 for stock option transactions via broker
Deposit date of V+1 for RSUs and RSAs
Calendar “known” transactions
Stock administration knows when RSU vest
Immediate notification for stock option exercises
Failsafe process to confirm/deny daily or periodic activity
Suzie

24. Yeah, we’re done! Here you go…

25. But what happens if…

26. Streamlining Processes
Same-day or close proximity transactions
Example 1
Jenn
Settlement to occur T+3 (2/25/13)
Payroll Deposit to occur T+4 (2/26/13)
This transaction will bring Social Security to annual maximum ($6,510 previously withheld + $ = $7,049.40)

27. Streamlining Processes
Same-day or close proximity transactions
Example 2
Jenn explain slides
Settlement to occur T+3 (2/25/13)
Payroll Deposit to occur T+4 (2/26/13)
Social Security maxed out in Transaction 1

28. Streamlining Processes
Same-day or close proximity transactions
Example 3 +
Jenn explain slides
YTD income surpasses $200,000 (Medicare threshold) and $1,000,000 (Supplemental Income threshold); part of transaction to be taxed at 2.35% Medicare rate and 39.6% Federal rate.
Medicare:
($66, taxed at 1.45% and $883, taxed at 2.35%)
Federal:
($866, taxed at 25% and $83, taxed at 39.6%)

29. Streamlining Processes
Payroll data entry needs to match stock system and employee confirmations
Example Data Entry Sequence #1
Entered First #2
Entered Next #3
Entered Last

30. Working Together Both need to understand: Solutions: Who to tax
employees vs. non-employees, jurisdictional requirements
What tax rates to apply
Income reporting and tax withholding triggers
Timing of reporting transactions
Solutions:
Create a matrix of taxability of various transactions
Multiple states/jurisdictions
Employees (and former) only

31. Appendix

32. Sample Taxability Matrix: U.S. RSU and NQSO
Suzie
How many of you know what “exercise means

33. Sample Matrix: U.S. ESPP Taxable Values
Suzie
Prepare matrices to explain taxability and timing to Payroll

34. RSU Global Tax* Taxable Compensation Shares Withheld Austria
Company will withhold shares from vested portion of grant to cover tax liability
Canada
China
Finland
Germany
India
Italy
Switzerland
United Kingdom
United States
Taxable Compensation
Company will report taxable compensation but will not withhold any taxes
Australia
Czech Republic***
France (Q) **
Hong Kong
Japan
Korea***
Poland
Russia***
Singapore
Taiwan
Company will report taxable compensation and may withhold taxes through payroll
Austria
France (NQ)**
Spain
Sweden
* Handling of Global tax is subject to change based on local regulations and requirements. Any tax rates applied to RSU vested shares are provided by Regional Finance groups based upon estimated values of compensation. Please direct your tax rate related questions to your Regional Finance group who processes your Payroll.
** French RSU Sub-plan (“Q”) requires two year vesting period and no tax withholding. FY13 grants not under the sub-plan (“NQ”) will be taxable at vest. [Non-Qualified grants issued in FY14 will be reviewed for taxation in FY15.

35. Terminated Employees
Transactions by former employees are generally subject to the same withholding and reporting requirements that apply to current employees.
Under Regulation § (a)-1(a)(5) any payment for services constitutes wages regardless of whether or not the employment relationship exists at the time the payment is made:
“Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.
Thus, excluding the exceptions described below, compensation income recognized by a former employee should be reported on a Form W-2 and should be subject to withholding.
W-2s need to be prepared for terminated employees and may need to be reactivated in payroll system
Address changes
See if changes can be forced through company (e.g. broker doesn’t unilaterally change in their own system)
Explore messaging ability on vendor sites to remind former employees to change their address
Ideally advance communication about transactions for terminated employees
Develop batch process for communicating post termination activity to Payroll
Don’t wait until the very end of the year = during crunch time

36. Thank you for your attention
Suzie Bentley, CPP Christine Zwerling, CEP Director, Stock Admin & 401(k) Senior Equity Compensation Consultant NVIDIA Corp. Stock & Option Solutions, Inc Tel Tel
The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects of the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax, or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. Consult your own advisors before deciding what, if any, course of action to take in your own particular situation.