What is Nonqualified deferred compensation?
In short
Nonqualified deferred compensation lets an employee defer pay to a later year under an unfunded promise from the employer. If section 409A's rules are followed, it is taxed only when paid.
Key takeaways
- Deferral elections must generally be made before the year the pay is earned, and payments allowed only on events such as separation or a fixed date.
- Breaking the rules makes the deferred amounts taxable at once, plus a 20% additional tax and interest.
- The employer deducts it when the employee includes it in income; Social Security and Medicare taxes usually apply when it vests.
Where it's tested
TCP: Individual Tax Planning Strategies — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A taxpayer sells stock at a $10,000 loss on December 10 and repurchases the same stock on December 28 of the same year. What is the tax result?