What happens after an employee exercises their vested shares in your company? If any employees exercised shares that included incentive stock options (ISOs) last tax year, your company needs to file IRS Form 3921 to inform the IRS which shareholders received ISO compensation. You must file one form per ISO exercise—and if you miss the deadline, fail to file, or make significant mistakes on the forms, your company could end up paying fines up to $3,426,500 for tax year 2022. Below, we’ll walk through everything you need to know to file annual Form 3921s on time.
How to file Form 3921
You can file Form 3921 either by mail (February 28) or online (March 31). There are three different copies to be aware of. You’ll need to:
- File copy A with the IRS, either electronically or by mail
- Give copy B to the employee who exercised options
- Keep copy C for your company’s records
If you have to file 250 or more 3921s, you must file online. Either way, you’ll need to compile these things to get started:
- A list of which employees exercised ISOs in the previous year
- Those employees’ tax ID numbers, full names, and addresses
- Your company’s transmitter control code (TCC)
- If you’re filing online, you’ll also need an account on the IRS’ Filing Information Returns Electronically (FIRE) system
Filing online
If it’s your first time filing online, you’ll need to electronically file Form 4419 so the IRS can assign you a TCC, which will allow you to set up a FIRE account. This may take a few weeks, so you’ll want to start the process at least a month before the deadline.
Filing by mail
If you choose to file by mail, you can’t just print out the forms yourself and send them in. Unique IRS machines process the forms and can only read IRS-supplied paper. You can order this paper on the IRS website.
Filing through Carta
If you use Carta to prepare Form 3921, filing is easy thanks to an automated process and step-by-step guide. It will also require your company to provide two additional pieces of information. We’ll need each employee’s email addresses to distribute copy B of the form automatically. We also need your fair market value (FMV) as of the date of exercise to determine taxation based on the difference.
Form 3921 deadlines
Filing Form 3921 on time will require you to meet these deadlines:
- January 31: deadline to provide copy B to all employees who exercised ISOs in the previous year
- February 28: deadline to file copy A with the IRS if filing on paper
- March 31: deadline to file copy A with the IRS if filing electronically
If an IRS filing deadline falls on a holiday or weekend, the deadline is automatically extended to the following business day.
How to avoid Form 3921 fines
If you don’t file the correct information by February 28 (paper) or March 31 (e-file), you’ll likely pay a penalty. How much you pay depends on when you file the correct form. If you correctly file:
Within 30 days after the due date
You’ll pay $50 per form (i.e. per employee who exercised an ISO). The maximum penalty is $571,000 per year or $199,500 for small businesses (i.e., any business with an average of $5M or less taxable income for the last three years).
More than 30 days after the due date, but by August 1
You’ll pay $110 per form. The maximum penalty is $1,713,000 per year or $571,000 for small businesses.
After August 1, or if you never correctly file
You’ll pay $280 per form. The maximum penalty is $3,426,000 per year or $1,142,000 for small businesses. But if the IRS finds that your company intentionally disregarded the deadline, they might impose the maximum fine of $570 per form. This penalty is uncapped regardless of business size.
Penalties only apply if you don’t file or if there are material errors on the submitted forms. For example if the payee’s tax ID number or surname is incorrect and prevents the IRS from processing the return, you would get fined. The maximum penalty increases each year, so get your forms in on time.
Carta generates Form 3921 in one click
Don’t get stuck paying fines or waiting for IRS paper to arrive in the mail. You can generate all your 3921s in seconds with Carta’s 3921 product. When your cap table is on the platform, it automatically tracks when employees exercise ISOs. When tax season comes around, Carta’s system generates three copies of each form. You can deliver copy B to employees with one click and store copy C on the platform for your records.
When you file Form 3912 online with Carta, everything you need is in one place. Just download 3921 copy A and find your TCC code in your settings. From there, it’s a matter of following the instructions on the IRS site.
Request a demo or get in touch with your customer success manager to start streamlining Form 3921 filing.
This article was originally published on November 11, 2019.
