Form 3921 is an IRS form that must be filed by a company when an employee has exercised an incentive stock option (ISO) in the last tax year. Form 3921 informs the IRS which shareholders received ISO compensation. You must file one form per ISO exercise. If you miss the deadline, fail to file, or make significant mistakes on the forms, your company could end up paying fines—up to millions of dollars in the worst-case scenario— for tax year 2023. Below, we’ll walk you through everything you need to know to file annual tax Form 3921s on time in 2024.
What you’ll learn:
You can file Form 3921 either by mail (deadline: February 28) or online (deadline: April 1). There are three different copies required to file. 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
Starting in the calendar year 2024, if you need to file 10 or more Form 3921s or other information returns, you must file them electronically by April 1, 2024, for the tax year 2023. Either way, you’ll need to compile the following information to get started:
A list of which employees completed an exercise of an incentive stock option in the previous calendar year
Those employees’ tax ID numbers, full names, and addresses
Your company’s transmitter control code (TCC)
If filing online, you’ll also need an account on the IRS’ Filing Information Returns Electronically (FIRE) system
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 (by March 1, 2024).
Filing by mail
If you choose to file by mail, you cannot 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
Each employee’s email address to distribute copy B of the form automatically
There are three key deadlines to know for Filing Form 3921 on time:
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
April 1: 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.
If you don’t file the correct information by February 28 (paper) or April 1 (e-file), you’ll likely pay a penalty. How much you pay depends on when you file the correct form.
If you file correctly:
Within 30 days after the due date
You’ll pay $60 per form (i.e., per employee who exercised an ISO). The maximum penalty is $630,500 per year, or $220,500 for small businesses (i.e., any startup or other business with an average of $5 million or less taxable income for the last three years).
More than 30 days after the due date, but by August 1
You’ll pay $120 per form. The maximum penalty is $1,891,500 per year or $630,500 for small businesses.
After August 1, or if you never correctly file
You’ll pay $310 per form. The maximum penalty is $3,783,000 per year or $1,261,000 for small businesses. But if the IRS finds that your company intentionally disregarded the deadline, they might impose the maximum fine of $630 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 identification number or surname is incorrect and prevents the IRS from processing the return, you’ll get fined. The maximum penalty increases each year.
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 3921 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.