Share options: the potential employee pitfalls

Companies are increasingly utilising share awards to reward, retain and recruit talent in a highly competitive job market.

Share options remain one of the most common forms of share-based remuneration in Ireland but the tax and reporting implications can easily be misunderstood by employees who are personally liable to report and pay taxes to Revenue.

Revenue are carrying out a compliance campaign and have identified that many employees are unaware of their personal tax obligations. We are seeing an increasing number of Revenue intervention letters being sent to employees who have not fully complied with their obligations.

In this article we will provide a brief overview of the relevant tax and reporting implications, the importance of getting this right, and how employers can help.

Tax and reporting implications

Employee

The gain arising on the exercise of a share option is subject to income tax, Universal Social Charge (“USC”) and employee Pay Related Social Insurance (“PRSI”).

It is a self-assessment obligation of the employee to remit these taxes to Revenue within 30 days of exercise. This should be accompanied by a Form RTSO1, which reports the taxable gain. Employees must also submit a Form 11 income tax return by 31 October following the year of exercise.

Employees are often unaware of their full obligations in this regard. Common errors include the payment of taxes without an accompanying Form RTSO1 or employees not being aware that exercising a share option makes them a “chargeable person” required to submit a Form 11 income tax return. Both reporting failures can result in penalties for the individual. Interest may be due where payment of the taxes due is not made within 30 days of exercise.

It is also worth noting that employees may receive dividends or realise a capital gain in connection with the shares acquired on exercise of a share option, triggering further tax and reporting obligations for the individual. Non-compliance by an employee can be very costly with penalties for non-compliance ranging from 3% to 100% of the tax liability, interest being charged at a rate of 0.0219% per day from 1 January 2023 (previously 0.0322%) on any underpaid liability and also a risk of publication on Revenue’s quarterly tax defaulters list.

Employer

Employers are required to submit an annual share scheme reporting return (Form RSS1) to Revenue by 31 March following the end of each tax year. The Form RSS1 reports details of all employee share options granted and exercised in the tax year but the reporting and payment of the tax liability itself remains an obligation of the employee. As outlined below, differences between an employer’s Form RSS1 reporting and an employee’s Form RTSO1 reporting are common causes of Revenue interventions.

Whilst share options have been a self-assessment item for many years in Ireland it is not unusual to see amounts being processed via payroll, particularly where overseas headquartered businesses are operating a share option plan in Ireland for the first time. Employers should also be aware of the distinction between share options and other types of share-based remuneration (such as ‘RSUs’) which do give rise to a payroll obligations.

The importance of getting this right

Whilst the above obligations are ultimately personal to the individual, it is important to remember that they arise in connection with an award granted by the employer. As such, and in our experience, employees often expect their employer to have notified them of the relevant obligations.

In cases of non-compliance by an employee, particularly through a lack of awareness, it is common for their first point of contact to be their employer. This can be time consuming for both the employee and employer, creating tension which could have been avoided were the employees made aware of their obligations at the outset.

This can also potentially reduce the effectiveness of the incentive arrangement as employees become concerned by the perceived complexities of participating in the company share plan.

How employers can help

Employers are increasingly committed to assisting their employees in this area. Areas of focus include:

• Employee communications covering both the tax and operational aspects of the plan. Ultimately a better understood and administered share option arrangement will be of more benefit to both employees and employers.
• Accurate Form RSS1 reporting. In some cases, employees may have fully complied with their personal obligations but their employer has reported details incorrectly on the Form RSS1. This can result in an erroneous Revenue intervention being directed to the employee, when in fact the employer needs to correct their Form RSS1.
• Provision of data to employees. Linked to the above, some employers actively provide employees with the details to be reported on their Form RTSO1 to ensure accurate and consistent reporting by both the employee and employer. Deloitte can provide technology solutions in this regard.

Conclusion

As employers continue to utilise share-based remuneration to reward, retain and recruit talent, it is important that the associated tax implications are fully understood by both employees and employers.

Employers should ensure that they are correctly treating and reporting their share option arrangements and consider providing clear employee communications, ensuring a better-understood share option arrangement.

This fosters compliance, reduces complications, and strengthens the incentive plan's effectiveness.

If you would like to discuss this further, or have any questions, please speak to your usual Deloitte contact. Alternatively, please reach out to the equity incentives team below.