Payroll taxes work differently than income taxes and differently for full value plans versus phantom stock option plans.
Full Value Plans
Full value plans are generally treated in the same way as other nonqualified deferred compensation plans. Under this plan type, FICA (OASDI), FUTA and Medicare taxes are due on account balances as they vest. If, for example, an award’s vesting schedule is 20% per year then payroll taxes would be due each year on 20% of the grant’s value as of the vesting anniversary date. Once payroll taxes have been paid on a vested portion of the grant, no further payroll taxes are due on that portion at distribution time.
Phantom Stock Option Plans
Phantom stock option plans are treated in the same way as other forms of compensation. That is, FICA (OASDI), FUTA and Medicare taxes are due when the amounts are distributed. However, once the award has vested and matured (i.e., payments have begun), payroll taxes are due on the entire balance even if it will be paid in installments. This treatment of phantom stock option plans falls under the special timing rule in Section 3121(v)(2)(A) which indicates that an amount deferred must be taken into income as wages for FICA (OASDI), FUTA and Medicare purposes on the later of when (1) the services are performed; or (2) the right to the amount deferred no longer is subject to a substantial risk of forfeiture. A deferred amount under this type of plan, may be taken into account at a later date if all or a portion of the amount deferred is not “reasonably ascertainable” until that later date. An amount deferred is “reasonably ascertainable” when the benefit amount, form and commencement date are known, and there are no actuarial or other assumptions needed to determine the amount deferred, other than interest and mortality. FICA and related taxes are imposed at that time.