3620 / What reporting and withholding requirements apply for employers who grant nonqualified stock options?

Employers are to use code “V” in Box 12 on Form W-2 to identify the amount of compensation to be included in an employee’s wages in connection with the exercise of an employer-provided NQSO. Completion of code V is addressed in the instructions for Forms W-2 and W-3. Employers must report the excess of the fair market value of the stock received on exercise of the option over the amount paid for that stock on Form W-2 in boxes 1, 3 (up to the Social Security wage base), 5, and 12 (using code V) when an employee (or former employee) exercises his or her options.¹ If an employer were to fail to claim the exception to 409A and violate Section 409A, it would follow reporting and withholding required for Section 409A plans ( Q 3541).