Chapter 12

A person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business

A fixed regular payment by an employer to an employee in exchange for the employee's services; usually paid on a monthly basis, but typically expressed as an annual amount.

A payment by an employer to an employee in exchange for the employee's services; typically expressed in an hourly, daily, or piecework rate.

A term use to denote both the Social Security and Medicare taxes upon earned income. For self-employed taxpayers, the terms "... ..." and "self-employment tax" are synonymous.

A form filled by the employer for each employee detailing the income, Social Security, and Medicare wages and taxes withheld. Additionally, state income, state taxes withheld, dependent care benefits, and many other tax-related items are reported.

A form used by a taxpayer to supply her employer with the information necessary to determine the amount of tax to withhold from each paycheck.

A test used to make a subjective determination such as whether the amount of salary paid to an employee is reasonable. The test requires the taxpayer and the IRS to consider all the relevant facts and circumstances surrounding the situation in order to make a decision. The relevant facts and circumstances are situation-specific.

The process of becoming legally entitled to receive a particular benefit without risk of forfeiture; gaining ownership.

The price at which holders of stock options may purchase stock in the corporation issuing the option

The use of a stock option to acquire employer stock at a specified price.

The difference between the fair market value of the employer's stock and the amount employees pay to acquire the employer's stock.

A technique where options are exercised and at least a portion of the shares are sold in order to facilitate the purchase.

A type of stock option requiring employees to treat the bargain element from options exercised as ordinary income in the tax year options are exercised. Correspondingly, employers may deduct the bargain element as compensation expense in the tax year options are exercised.

A type of stock option that allows employees to defer the bargain element for regular tax purposes until the stock acquired from option exercises is sold. The bargain element is taxed at capital gains rates provided the stock is retained long enough to satisfy certain holding period requirements. Employers cannot deduct the bargain element as compensation expense.

The date on which employees receive stock options to acquire employer stock at a specified price.

The date on which the taxpayer becomes legally entitlted to receive a particular benefit without risk of forfeiture.

The date employees use their stock options to acquire employer stock at a discounted price.

The sale of stock acquired using incentive stock options prior to satisfying certain holding period requirements. Failing to satisfy the holding period requirements converts the options into nonqualified stock options.

Stock employees receive as compensation that may be sold only after the passage of time or after certain performance targets are achieved. Because employees are not entitled to immediately sell the restricted stock they receive, the value of the stock is generally not taxable to employees or deductible by employers until the selling restrictions lapse.

A special tax election that employees who receive restricted stock or other property with ownership restrictions can make to accelerate income recognition from the normal date when restrictions lapse to the date when the restricted stock or other property is granted. The election also accelerates the employer's compensation deduction related to the restricted stock or other property.