A recent change in financial accounting standards has resulted in questions regarding the US income tax withholding rules applicable to equity compensation.
Under ASU 2016-09, FASB allows favorable financial accounting treatment for equity awards if the number of shares that are withheld pursuant to net share settlement (and the taxes paid in cash) does not exceed a number of shares having a value equal to tax withholding obligations calculated using rates of up to the "maximum statutory tax rates in the applicable jurisdiction." Assuming that ASU 2016-09 is adopted or otherwise applicable to a company, at least two questions arise. First, what is the maximum statutory rate applicable in the US and is that rate permitted to be used for federal income tax withholding purposes? And, second, once the maximum rate and appropriate withholding are determined, does the plan and the grant documentation permit use of such withholding rates? Some employers have been under the impression that employees can now simply request withholding on equity compensation at the highest marginal individual income tax rate, which currently is 39.6%. However, this may not be as simple as it appears since detailed rules and regulations, as well as plan provisions, may limit the withholding options.