NQDC Alert: What’s New For The 2021 Tax Season

Here’s a quick take on things to be aware of when your tax return involves nonqualified deferred compensation. (These items are separate from the 2018 tax changes, which still affect tax rates and brackets.)

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 on Line 1 of Form 1040.

See also the related FAQ at our sibling website 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 our sibling website myStockOptions).

Need An Extension?

If you 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.

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.

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