You must report the purchase of nonqualified stock options to the Internal Revenue Service or face penalties. Nonqualified stock options don't receive the same type of tax treatment as employee-incentive stock options because the nonqualified options don't meet the criteria set by the IRS. Once a nonemployee exercises nonqualified stock options, the business granting the option must report the nonemployee's gain to the IRS on Form 1099-MISC, as only employee nonqualified options are reported on a W-2 form.
Complete the payer section of the Form 1099-MISC. The payer is the business issuing the nonqualified stock. Insert the company's name, address and telephone number in the payer's box. Insert the payer's federal identification number in the labeled box.
Enter the recipient's information on the form. The recipient is the person who received the nonqualified stock. Enter the recipient's name, address and identification number in the labeled boxes. The identification number is the recipient's federal identification number or Social Security number.
Enter the account number you assigned the recipient, if any, in the account number box. The box is for a number you gave the recipient for your records, but you're not required to provide an account number.
Determine the fair-market value of the stock on the day the recipient exercised the option to buy. The fair-market value is typically the average of the purchase day's high and low prices for a publicly traded company.
Calculate how much the recipient gained from the nonqualified stock. Subtract the total price the recipient paid for the stock from the total fair-market value. The result is what you must report on the 1099. For example, if the recipient received 10 shares with a fair-market value of $20 each for $10 each, the gain is $100.
Enter the gain on the Form 1099-MISC in the box for nonemployee compensation. The box is labeled "7" at the time of publication.
Research the company's financial health and recent stock transactions to determine fair market value for private stocks.
Contact the IRS at 800-829-4933 for help or to request blank forms.