What Is Form 3921? A Guide for Startups Issuing ISOs
Form 3921 is a tax form that helps the IRS keep track of when and how employees exercise their Incentive Stock Options (ISOs). A startup is required to file one Form 3921 per ISO exercise—and to send this form to the employee to file with their personal taxes, too.
In this guide, we’ll review how and when to file the all-important Form 3921. We’ll also show you how to use Pulley to generate a fully compliant Form 3921 and create copies that you can send to employees and keep for your own company records.
- What is Form 3921?
- Who needs to file Form 3921?
- When does my startup need to file Form 3921?
- What happens if my startup doesn’t file Form 3921 on time?
- How to file Form 3921
- Generate your Form 3921 on Pulley
What is Form 3921?
Form 3921 is an Internal Revenue Service (IRS) form that companies must file for tax years when their employees exercise any Incentive Stock Options (ISOs).
Why does the IRS need this form? Well, we know that exercising stock options can have tax implications. Form 3921 is an informational form that helps the IRS (as well as the employee exercising the options) verify what those implications might be. The IRS uses this form to ensure that individuals are correctly reporting income related to equity compensation on their personal tax returns.
Early-stage startups may be new to these types of informational tax forms, but it’s important to understand exactly what the IRS is asking for—ideally before the late notices and fines start to stack up. To that end, it’s important to note that the IRS requires one Form 3921 per ISO exercise. Each of these Forms includes four copies:
- Copy A must be filed with the IRS. On the downloadable version of Form 3921, Copy A (the red one) is provided for informational purposes only. Don’t make the mistake of printing out this version and sending it in, as you may be penalized if you file Copy A with a form that can’t be scanned. Note that Copy A can also be filed electronically through the IRS’s FIRE system.
- Copy B must be sent to the employee who exercised stock options.
- Copy C is for the company whose stock was transferred, and should be kept with that company’s records.
- Copy D is for the Transferor’s records. (The Transferor and company are usually the same, so usually only three copies are needed.)
Great, so we’ve got the basics down! But before we move on, let’s refresh ourselves on a key point we don’t want to gloss over: What’s an ISO and why does this type of stock option require Form 3921?
Quick review: What are Incentive Stock Options (ISOs)?
Incentive stock options (ISOs) are one of the two main types of stock options you’ll encounter in the U.S. ISOs are specifically a product of the U.S. tax code, and what makes them unique is that they can only be granted to a company’s employees. Contractors, consultants, advisors, etc. do not qualify for ISOs and may instead receive non-qualified stock options (NSOs).
Fortunately, we have a whole guide that spells out the key differences between ISOs and NSOs. For our purposes here, it’s enough to say that ISOs come with one cool benefit that NSOs don’t—they qualify for a favorable tax treatment if they meet certain criteria. Assuming all of these criteria are met, the difference between the exercise price and the stock’s fair market value at the time of exercise is not subject to ordinary income tax. (though it may be subject to the alternative minimum tax, or AMT).
This difference in tax treatment is a key reason why the IRS requires companies to provide Form 3921 as an informational tax form.
Who needs to file Form 3921?
If your company has employees who exercised ISOs in a calendar year, you need to file one Form 3921 per exercise for that calendar year.
There is one exception to this rule. A Form 3921 may not be required if the employee exercising ISOs is a nonresident alien and doesn’t need to be provided with a Form W-2. For more specifics about who must file Form 3921, see the IRS instructions.
When does my startup need to file Form 3921?
There are really two pertinent questions here:
- When does your startup need to send Form 3921 to relevant employees?
- When does your startup need to file Form 3921 with the IRS?
Let’s tackle each of those deadlines separately.
Deadline for startups to send Form 3921 to employees
As of 2022, if your startup has any employees who exercised ISOs in the prior calendar year, you will need to send Form 3921 to those employees by January 31.
So, if the exercise of an incentive stock option took place in March of 2022, the relevant employee should receive Form 3921 from you (Copy B) by January 31, 2023. It’s a good practice to provide Form 3921 to employees who need it even earlier, as this gives them more time to figure out their personal tax return.
You can reference the IRS website (www.irs.gov) for more general information on when certain IRS Forms must be furnished to recipients.
Deadline for startups to file Form 3921
As of 2022, Form 3921 must be filed on paper by February 28 or electronically by March 31 of the year following the tax year in question.
Your startup may be able to get an automatic 30-day extension if you complete Form 8809, either on paper or through the FIRE System. See the IRS website for more information on form filing deadlines and extensions.
What happens if my startup doesn’t file Form 3921 on time?
What, you’re already expecting that you’ll be late to file? Have more faith in yourself (or, more likely, your accountants)!
We hate to break it to you, but you may be subject to certain penalties if you fail to file Form 3921 by the due date. How much you may have to pay up depends on how late you are in getting the forms back to the IRS. Here’s a breakdown of the penalties as of tax year 2022:
- $50 per form if you correctly file within 30 days (by March 30 if the due date is February 28). The maximum penalty is $588,500 per year or $206,000 for small businesses.
- $110 per form if you correctly file more than 30 days after the due date but by August 1. The maximum penalty is $1,766,000 per year or $588,500 for small businesses.
- $290 per form if you file after August 1 or you do not file required information returns. The maximum penalty is $3,532,500 per year or $1,177,500 for small businesses.
Take a look at those maximum penalties. Woo-wee. The bottom line is that fines can quickly add up if you don’t pay attention to critical details, such as deadlines and the information on the forms themselves. Your best bet is to do it early and to do it accurately. Obvious advice, perhaps, but important nonetheless.
How to file Form 3921
There are two ways to file Form 3921: by mail or online. Though this number may be reduced by soon-to-be-issued regulations, you are required to file electronically if you have 250 or more Forms 3921. (Stay up to date on the most recent reporting requirements here.) If you plan to file online and haven’t done so before, you’ll need to set up an account on the IRS’ Filing Information Returns Electronically (FIRE) production system.
You will need some basic information in order to file Form 3921, which Pulley can help you generate. First of all, you’ll need a list of all the employees who exercised ISOs in the previous tax year—including their tax ID numbers.
For each individual Form 3921, you’ll need the following information:
- The grant date of the option
- The exercise date of the option
- The exercise price per share of stock
- The fair market value (FMV) per share of stock on the date the option was exercised
- The number of shares of stock transferred pursuant to the exercise of the option
- Your company’s name, address, and TIN (taxpayer identification number)
- The employee’s name, address, and TIN (usually this is the employee’s Social Security number).
Generate your Form 3921 on Pulley
Now that you know what Form 3921 is and when your startup needs to file it, your next question may be, “Can Pulley help?” To which our answer is a resounding, “Why, yes, we can!”
Companies that use Pulley can generate Form 3921 directly in the platform. We automatically produce the paper copies of the form, and ahead of the 2022 tax season we’ll be able to produce the Copy A file that can be used on the IRS’s FIRE system.
To make your life even easier, Pulley also automatically generates a table of all the stakeholders who have exercised options in the last calendar year. If no stakeholders have exercised options, you’re off the hook!
If you’re interested in learning more about Form 3921 or how Pulley can add clarity to your company’s equity or tax situation, schedule a call with us today.