California's Compliance Resolution Program for 409A taxes
In February 2007, the IRS created a Compliance Resolution Program (Announcement 2007-18) that permitted employers to pay their rank-and-file employees' additional taxes arising under Internal Revenue Code (IRC) Section 409A. These additional taxes are due to employees' exercise of certain discounted stock options and stock appreciation rights in 2006. California's Revenue and Taxation Code (R&TC) Sections 17501 and 24601 allows IRC Section 409A to apply to California taxpayers.
After the IRS established its Compliance Resolution Program, FTB issued FTB Notice 2007-1, California's Compliance Resolution Program for Employers Participating, or Intending to Participate, in the IRS Compliance Resolution Program Regarding Internal Revenue Code Section 409A, (California Program). The California Program parallels the IRS Program. Employers were required to file a notice of intent to participate in the California Program with FTB by March 15, 2007. Find more information on FTB Notice 2007-1, and additional instructions, on our Website (search for 409A).
The California Program allowed employers to step forward and pay the additional 20 percent tax, and interest tax that employees owed. For California purposes, the interest tax component of Section 409A is calculated using California's highest marginal tax rate in effect for 2005 (9.3 percent), and the interest rate applicable for underpayments under California law, plus one percent.
The 409A taxes paid in 2007 on behalf of an employee by an employer participating in the California Program are additional compensation to the employee, and should be included in the employee's 2007 Form W-2. Employees may choose to modify their withholding or estimated tax payments for 2007 in anticipation of this additional compensation.
If you have clients who owe the additional 409A 20 percent tax and interest, they remain liable for these amounts on their 2006 California income tax returns, if their employers did not participate in the California Program, or failed to fulfill the California Program requirements.