Stock Options Spared From Payroll Tax

This time, what corporate America was angling for actually benefited its employees as well.

In a reprieve for millions of employees and their employers, the Bush administration put an indefinite hold on Internal Revenue Service plans to begin imposing Social Security, Medicare and unemployment taxes on incentive stock options and employee stock purchase plans.

The IRS had decided last November to reverse a regulatory interpretation that had been in place since 1971. That hotly contested decision meant that in January 2003, the IRS would begin imposing payroll taxes on the difference between the market price and the purchase price of company stock acquired through employee stock purchase plans and incentive stock option plans.

Opponents arguing on behalf of the little guy contended that the rule change would put a disproportionate burden on the lower- to middle-income workers, while higher-paid executives would be unaffected. Earnings above $84,900 in a calendar year aren't subject to payroll tax.

The real outrage, though, came from the corporations themselves, which argued that not only would the tax collection be costly and difficult to implement, but it also would discourage employees from holding on to company stock.

The payroll tax on options would have cost companies anywhere from $169 million to $338 million annually to administer, according to Ronald Bird of the Employment Policy Foundation, an organization strongly opposed to the bill. The implementation alone, Bird said, would have cost between $270 million and $779 million.

Such business groups successfully lobbied the administration and Congress to block the IRS plan in late June. The Treasury complied with its indefinite postponement of the IRS plan, saying it needed more time to study the issue.

Congress, though, apparently decided it didn't need any time to study the issue, and already had begun considering several bills to stop the proposed legislation. Now that the Treasury has stepped in, though, Congress is free to devote its financial savvy to more pressing issues, such as accounting reform.

If the administration does eventually decide to go ahead with the IRS plan -- an unlikely but not unthinkable outcome -- the Treasury promised that employers wouldn't be required to implement the changes until at least two years after the regulations have been issued in their final form.