Alert: What You Need To Know About Tax Returns Involving Nonqualified Deferred Comp

The alert below summarizes what you must know for your tax return in 2025 if you deferred compensation into and/or received distributions from a nonqualified deferred compensation (NQDC) plan in 2024. It’s excerpted from the comprehensive resources on nonqualified deferred comp at myNQDC.com.

Changes In Reporting On IRS Form 1040

The IRS Form 1040 tax return has been revised in the past few years. Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1a of Form 1040. (See also the article on tax-return changes at myStockOptions for more details on changes in Form 1040 reporting.)

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 from an NQDC plan 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 on this topic 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, you report that on Schedule 2 of your IRS Form 1040 tax return: Line 17h, “Income you received from a nonqualified deferred compensation plan that fails to meet the requirements of section 409A.”

The total on Schedule 2 is then entered on Line 23 (“Other taxes”) of Form 1040.

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

Mistakes To Avoid With Filing Extensions

If you need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the FAQ on mistakes to avoid with extensions. Note that the IRS routinely postpones the filing due date for taxpayers in areas affected by natural disasters. You can find out whether you qualify for a postponement in the IRS website section Tax Relief In Disaster Situations.

Equity Compensation Too?

Did you also have income in 2024 from equity compensation or sell shares acquired from equity comp? See the Tax Center at our sibling website myStockOptions for resources and guidance on tax returns involving equity comp and sales of company shares. If you exercised incentive stock options (ISOs), potentially triggering the alternative minimum tax (AMT), see an FAQ at myStockOptions on how to calculate it.

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