EIT on Stock Options

 

Updated March 29, 2000
On February 22, 2000 the Pa. Supreme Court rendered its decision in the case of the Marchlen v. The Township of Mt. Lebanon (click here for a PDF version of the court's slip opinion). The Supreme Court found stock options to be fully taxable as earned income tax at the local level, thus overturning the lower court's ruling (the spread between the price paid for the stock and the market value of the stock, at exercise, is fully taxable).

What does this mean?
Any stock option compensation not reported on your local final return as previously filed will need to be amended showing the additional compensation and calculating the additional local earned income tax due. Interest and penalties will be waived if the tax payments are made prior to April 18, 2000. Interest and penalties will apply to payments made after April 17, 2000. The interest and penalties applied will be calculated from April 17, 2000 to the actual date of payment.

Any local earned income tax refund paid previously pursuant to stock option compensation must be re-paid by the taxpayer. Interest and penalties will be waived if the tax re-payments are made prior to April 18, 2000. Interest and penalties will apply to payments made after April 17, 2000. The interest and penalties applied will be calculated from April 17, 2000 to the actual date of payment.

Any future return filed should include the taxable portion of the stock option compensation even if it is not listed in the local wage box of the W-2. The taxable portion for local earned income tax purposes is the same as the amount for Pa. State Personal Income Tax purposes. For tax year 1999, interest and penalties on tax underpayments related to stock options will apply only if paid after April 17, 2000. Such interest and penalties on payments made after April 17, 2000 will apply from April 17, 2000 to the date of payment. For tax years later than 1999, interest and penalties will apply to the date of payment from when quarterly estimated tax payments were due for the tax year, or in cases where that is not required, from April 15 of the year following tax year, if not paid before this date.

The application of interest and penalties described herein apply only to tax underpayments related to stock option income.