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A private company that was a customer/partner of my former employer gave me some non-qualified stock options. (Not ISOs, which are by law reserved for employees.) The company got bought by a public company, which transformed the options into options in the liquid public company, and the share price was well above the exercise price, so I exercised and sold. I did this in three separate transactions, cash for share certificates.

I think I have a pretty good handle on NQ options from www.fairmark.com, and Consider Your Options. The spread between the exercise cost and the stock's market value on the exercise date is self-employment income. The spread between the value on the exercise date and the sale price is a capital gain, short-term in this case.

As expected, I received a 1099-MISC from the company that detailed all this. The numbers look right.

But I also received a W2, with a much smaller amount (less than 10% of the amount of income on the 1099). It has "STOCK" and the same amount in box 14. It also shows Social Security and Medicare taxes as having been withheld.

Am I correct in thinking that I shouldn't have received a W2, since I was never an employee of this company?

http://www.fairmark.com/execcomp/nqoexer.htm says:

If you're not an employee of the company that granted the option, withholding won't apply when you exercise it. The income should be reported to you on Form 1099-MISC instead of Form W-2. Remember that this is compensation for services. In general this income will be subject to the self-employment tax as well as federal and state income tax.

My guess is that the company screwed up, that the 1099-MISC is sufficient and the W2 unnecessary, and that I need to get them to cancel the W2 before I do my taxes.

Or is there a reason that I'm missing for a company to send a W2 to a non-employee in this situation?

Thanks.
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