Tax Returns Involving Nonqualified Deferred Comp: What You Need To Know In 2021

Tax season is a busy time at myStockOptions. It's also a busy time at our sibling website myNQDC, all about nonqualified deferred compensation (NQDC) plans. These plans let you defer more income in addition to what you can defer via qualified retirement plans, such as a 401(k).

Based on the tax resources at myNQDC, below is a quick take on things to be aware of when your tax return involves nonqualified deferred comp. (These items are separate from the 2018 tax changes, which still affect rates and brackets that apply for your tax return.)

Changes In Reporting On IRS Form 1040

The IRS Form 1040 tax return has been revised again for the 2021 tax season. Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1 of Form 1040.

See also the related FAQ at myStockOptions for details on changes in Form 1040 reporting (estimated taxes, capital gains, alternative minimum tax) and on the new Form 1099-NEC for reporting nonemployee compensation.

W-2 Reporting Still Potentially Unclear

The IRS has still not finalized the Section 409A rules on W-2 reporting. Therefore, your company does not need to indicate deferred income on your Form W-2, though it may do so voluntarily in Box 14. (Once the IRS has finalized the 409A rules on W-2 reporting, income deferred during the year will have to be indicated with Code Y in Box 12.) Distributions from plans usually appear in the W-2 boxes used for wages and other compensation, along with Box 11 for nonqualified plans (see an FAQ at myNQDC).

What To Do If Your Company’s NQDC Plan Violates Section 409A

If your plan violates Section 409A and you need to pay a penalty and interest:

• Report this on Line 8 of IRS Schedule 2 (no longer directly reported on Form 1040).
• Check Box c.
• Enter the amount with the code NQDC.

This total on Schedule 2 is then entered on Line 23 ("Other taxes") of Form 1040. This is a change (it was different in prior years).

Depending on your employment status, the income that is subject to this additional tax will appear on Form W-2 or on the revised Form 1099-MISC and new Form 1099-NEC.

Alternative Minimum Tax

Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, deferrals of income can serve to prevent you from triggering the AMT in a tax year; conversely, income you receive in a distribution can trigger the AMT. While the 2018 tax changes reduced the likelihood of triggering the AMT by raising the exemption amounts and phaseout thresholds, you still need to calculate it (see a related FAQ at myStockOptions).

Need An Extension?

For 2020 tax returns, the usual April 15 filing deadline has been postponed to May 17, 2021. If you still need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the myNQDC FAQ on mistakes to avoid with extensions. Also, even with the delayed filing deadline, your first-quarter 2021 estimated taxes remain due by April 15.

Did you also have income from equity compensation or sell shares acquired from equity compensation? See the popular resources in the Tax Center at our sibling website myStockOptions.

More Tax Resources At myNQDC

The tax section of myNQDC has a full range of resources on tax returns that involve NQDC. For new Premium Memberships and renewals, please contact us (617-734-1979, [email protected]). We can process your membership directly by phone or email you an invoice.

Want to license readable, high-quality educational content on NQDC plans for participants, clients, or prospects? Find out about our corporate services in the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.

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