A Robotics Company Is Setting Aside 25% of Its Shares for Employee Stock Options. Exercising an Old Option After Retirement Can Show Up on a W-2 Without Counting Against Social Security

Faraday Future (NASDAQ:FFAI) is setting aside roughly 25% of its robotics subsidiary’s fully diluted shares for an employee equity plan. Under a term sheet announced September 28, AIxCrypto Holdings (NASDAQ:AIXC) would buy the robotics business at an estimated $200 million valuation.

A 64-year-old former employee retired last year and started Social Security while holding a nonqualified stock option earned during employment. This year he exercises it, and the gain shows up as compensation on his W-2.

That looks like wages triggering Social Security’s earnings limit. One retiree couldn’t understand why his former employer planned to withhold Social Security taxes on his option gain. IRS guidance treats a nonqualified option exercised in a year after it was earned as a special wage payment, and that payment does not count toward the earnings test.

Why a W-2 Doesn’t Settle the Social Security Question

If you claim benefits before full retirement age (FRA) and keep working, Social Security applies an earnings test. For someone reaching that age threshold in a later year, the 2026 limit is $24,480. Above that, Social Security withholds $1 in benefits for every $2 earned.

Special wage payments are the exception. These are dollars paid after retirement for work done earlier, such as bonuses, accumulated vacation pay or sales commissions. Social Security says wages earned in an earlier year than the year they’re paid usually do not affect benefits under the earnings test. IRS Publication 957 indicates a non-qualified stock option exercised in a year after the year it was earned is a special wage payment that should not count toward the Social Security earnings test.

The order of events matters. The worker earns the option in one year, then retires or starts benefits, then exercises the option in a later year. Pay tied to that earlier work gets special-wage treatment. Don’t assume the same treatment applies to incentive stock options or restricted stock units.

How $70,000 on Paper Becomes $20,000 for the Earnings Test

Say our retiree earns $20,000 from a part-time job this year. His option spread adds $50,000 of compensation, so his tax paperwork shows $70,000.

If Social Security counted all of it, he would be $45,520 over the limit and would have $22,760 of benefits withheld. Handled correctly, the option money is a special wage payment and only his part-time wages count, keeping him under the limit.

Social Security May Not Catch the Exclusion on Its Own

Social Security gets wage data without knowing which dollars came from past work. Employers can report qualifying payments on Form SSA-131, and the employee can also submit the form to the Social Security office handling the claim. Check that someone filed it. Without it, benefits could be withheld.

Income Tax Still Applies, and It Can Reach Your Benefits

Staying out of the earnings test doesn’t keep the money out of income tax. The spread is taxed as wages, and payroll taxes usually apply. That explains the retiree’s surprise.

It can also make more of his benefit taxable. Benefits become taxable once combined income passes $25,000 for single filers or $32,000 for joint filers. With this much wage income he’s past both, so up to 85% of his benefit may become taxable.

This is one of those quiet IRS rules that can drain six figures over a retirement if nobody flags it. We mapped it alongside eight others in a free guide to the tax traps retirees miss.

Six Points to Address Before You Exercise

1. Option type: Is it a nonqualified option or an incentive stock option? The IRS rule specifically covers nonqualified options.
2. Year earned: When did you do the work that earned the option? Find the grant and vesting records now.
3. Exercise year: Is it later than the year you earned the option? The rule requires a later year.
4. W-2 amount: How much compensation will be reported? Ask payroll before you exercise.
5. Current-year work: How much ordinary wage or self-employment income will you have? That is what the earnings test measures.
6. Form SSA-131: Has your former employer reported the payment as a special wage payment? If not, ask them to, or file the form yourself.

What Matters Most

An option exercise looks like new wages because that’s how it appears on your tax forms. For the earnings test, the question that matters is when you earned the option. Benefits withheld under the earnings test aren’t simply repaid later. At FRA, Social Security recalculates your monthly benefit to credit the months benefits were withheld.

The hardest mistake to undo is exercising before you have paperwork showing the option came from earlier work. Before you exercise, a conversation with your former employer’s payroll team and a tax professional can keep a windfall from becoming a headache.

Contact [email protected] for any questions or corrections.