Executive Benefits Practice • LOCKTON Financial Advisors
Payroll Tax r ep ort in g fo r c ontri b uti o ns to nqdc de f er r ed
com p e n sat ion p la n s
Tax reporting for contributions
to nonqualified deferred
compensation plans depends on
the employment status of the
plan participant. Tax information
for employees is reported using
Employee Tax Reporting (Form W-2)
Amounts deferred by employees, or amounts contributed by employers, to nonqualified
deferred compensation plans are not subject to income taxes until benefit payments are
considered received. Employee deferrals are subject to FICA taxes (Social Security and
Medicare) and FUTA (Federal Unemployment) taxes when the deferral occurs. Employer
contributions are subject to FICA and FUTA taxes when the contributions are no longer
subject to a substantial risk of forfeiture, normally when vesting in the account occurs.
Form W-2, while tax information
for independent contractors (i.e.,
Wage Reporting
agents or members of the Board
Since nonqualified employee deferrals and employer contributions are not subject to
income taxes, these amounts should not be included in amounts reported in W-2, Box 1,
Wages, Tips, and Other Compensation. Most states follow the federal rules for income tax
withholding. Check with your state for any differences from federal rules.
of Directors) is reported using
Form 1099 MISC.
If you have any questions
regarding this information, please
contact:
Suzette Clark
Vice President
[email protected]
816.960.9771
FICA, FUTA, and State Unemployment Tax Reporting
Employee deferrals into nonqualified deferred compensation plans are subject to FICA
and FUTA taxes currently, as if the employee had received the compensation. The
employer must withhold these taxes and pay any employer taxes at the time of deferral.
Employer contributions are subject to FICA and FUTA taxes at the later of:
™™
When the services are performed.
™™
When the employee no longer has a substantial risk of forfeiting the deferred
compensation. This usually occurs when the employer contributions become vested.
The calculation of these taxes on employer contributions depends on the vesting schedules
used.
™™
If the employee is immediately 100-percent vested, FICA and FUTA taxes are due
when employer contributions are made to the participant’s account.
Executive Benefits Practice • LOCKTON Financial Advisors
™™
For accounts that are not 100-percent vested, at the end of each year, the employer must calculate the change in the employee’s vested portion
from the prior year. FICA and FUTA taxes are due at that time on the increase in the vested amount. If, due to investment losses in the
participant’s account, the vested account balance is lower than the prior year’s vested balance, the participant should not be refunded FICA taxes
already paid. In this circumstance, however, FICA and FUTA taxes will not become due in the future until the new vested balance exceeds the
original amount on which tax had already been paid. Once the employee becomes 100-percent vested in their employer contribution account,
FICA and FUTA taxes are due only on additional vested employer contributions to the account, not on any earnings in the account.
Social Security wages should be reported in Box 3 (up to the wage base minimum), and Social Security taxes withheld should be reported in Box 4.
Medicare wages should be reported in Box 5, with Medicare taxes withheld reported in Box 6.
Any Social Security or Medicare wages reported in Box 3 or Box 5 related to services performed in prior years should be reported in Box
11, Nonqualified Plans. This would include changes in vested amounts in the employer contribution account that are related to prior year’s
contributions. Amounts in Box 3 or Box 5 that are related to current year services, either employee deferrals or employer contributions, should not
be reported in Box 11.
Most states follow federal rules for unemployment taxes. Check with your state for any differences.
Independent Contractor Tax Reporting (Form 1099)
No income tax or self-employment (SECA) taxes are due on deferrals or employer contributions into the plan at the time of deferral. Any
distributions from the plan to the participant are reported on Form 1099 in the tax year of distribution, and all taxes are paid at that time.
Code Section 409A Reporting (W-2 and 1099 MISC) and Notice 2008-115
Section 409A of the Internal Revenue Code mandates employer reporting of certain information related to deferred compensation plans. Under
Section 409A, employers are required to report the amount of compensation deferred for each plan participant and also report any amounts
deferred that are in violation Section 409A. For employee participants, on Form W-2, the IRS has specified Code Y for reporting deferral amounts
and Code Z for reporting amounts taxable due to plan violations. For nonemployee participants, on Form 1099 MISC, the IRS has specified Box
15a to report deferred amounts and Box 15b to report amounts taxable due to plan violations.
The Internal Revenue Service issued Notice 2008-115 detailing W-2 reporting and 1099 MISC reporting requirements for employers with
nonqualified deferred compensation arrangements.
™™
The IRS has suspended the reporting requirements for W-2 Code Y and 1099 MISC Box 15a (deferral) reporting for the 2008 and 2009 tax
years.
™™
For any amounts subject to taxation due to a violation of Section 409A, the IRS is mandating W-2, Box 12 Code Z and 1099 MISC
Box 15b reporting. The notice specifies the mechanics of reporting these amounts.
In order to avoid Code Z reporting and participant tax penalties, employers should carefully scrutinize all deferred compensation arrangements to
ensure they are in compliance with Section 409A.
Disclaimer: This communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all
necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this
communication is not intended to constitute U.S. federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the
Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.
This document contains proprietary work product of Lockton Financial Advisors, LLC, & Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction,
disclosure, or distribution to any third party without first securing written permission is expressly prohibited.
Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member FINRA, SIPC. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton
Insurance Services, LLC, license number 0G13569
Reprinted with permission of the Principal Financial Group.
© 2013 Lockton, Inc. All rights reserved. Images © 2013 Thinkstock. All rights reserved.
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