Deferred Compensation

[gats1016]

Is deferred comp subject to FICA tax?  My client received a 1099 with his deferred comp of $108,000 in box 7.  Federal and state income taxes were withheld, but I'm not sure where to report the income and if it is subject to FICA

[Just-Lisa-Now-]

I had someone in yesterday with 3 Deferred Comp W2's, none of them had SS or Mdcr withheld, I dont think the 1099MISC Box 7 is the proper form to report that.

[Laura49 · Accepted solution]

Compensation is to be reported on a W2 in Box 1 and 11 plus box 16 for state wages.  The 1099 is the incorrect form for reporting Deferred Comp.  I myself receive Deferred Comp and have never received a 1099.  Ask your client for the agreement with his former employer to make sure it truly is Deferred Comp.  

[BobKamman]

I understand the question as referring to a 1099R.  It's a distribution from a retirement plan, contributions to which were subject to FICA taxes unless the employer was exempt.  Occasionally I see a W-2 for deferred compensation from a nonqualified plan -- those were mostly set up for higher-level executives, and not subject to Section 401 rules.  

[Just-Lisa-Now-]

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@BobKamman wrote:

I understand the question as referring to a 1099R.  It's a distribution from a retirement plan, contributions to which were subject to FICA taxes unless the employer was exempt.  Occasionally I see a W-2 for deferred compensation from a nonqualified plan -- those were mostly set up for higher-level executives, and not subject to Section 401 rules.  

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 Ahhh, ok.  Anytime I see someone ask about a 1099 with Box 7 and FICA, I assume its a 1099MISC

[BobKamman]

It might have been a 1099-MISC; I just noticed the Box 7 reference.  According to one source, this would be the correct way of reporting distributions to a company director.  Also, a beneficiary of a deceased employee.    I think the former would be subject to SE tax, but not the latter.

https://www.stevenslee.com/tax-reporting-for-nonqualified-deferred-compensation-plans/

[gats1016]

He was on the Board of Directors.  I just thought it was odd that it was reported to him on a 1099-Misc instead of a W-2.  So I would have to put it on a Schedule C and do SE tax?

[gats1016]

I didn't think so either, but he was on the Board of Directors.  I asked to see his documents on his Company's Deferred Comp Plan.  We will see if he can "find" them.  Thanks for your help

[Laura49]

First, read the document or have your client contact the company he received the Deferred Comp 1099 form and ask why it was reported that way.  It could be a simple as the admin person doing the 1099's didn't know the rules.

Second, if they insist it is correct then you have to get the documents from your client to make sure it really is Deferred Comp and not something else.  The contract will spell out what the compensation is for.

Third, if it is truly Deferred Comp and has formerly been subject to Social Security & Medicare then here is what I would do.

Report as income and expense on Sch C so zero profit.  For the expense put the explanation "Deferred Comp previously taxed for SE tax but reported on wrong form.  It might take 2 lines but you can get it to work.  Then report in in Other Income on the 1040 not subject to SE tax.  Put in the same explanation.  That way you will be reporting the 1099 MISC for the computer matching and subjecting the income to income tax but not SE tax.   Before you do this really make sure you have documentation that it is truly Deferred Comp.  You need to see the documents yourself.

Hope this helps!

[gats1016]

Thank you so much Laura

[Carol65]

Laura49

I'm wondering if you can help me.  I have always input compensation as you described with no problem.  This year I am receiving this diagnostic -

Form W-2 #1: Contains amounts for (11) Nonqualified plans or Wages earned while
incarcerated. These amounts are reported on the Schedule 1 and are not included in
the wage amount reported on Form 1040. This return will be rejected and must be
filed on paper. The IRS is reviewing the applicable business rule and will be
addressing this issue in the future.

 Are you having this problem too?  Do you have any advice? 

Thanks for your time.

[Laura49]

I just looked at my return and I have always reported the W2 on Line 1 for federal wages, Box 12 with code Y and Line 16 for state wages.  I have federal and state taxes withheld so I also use boxes 2 and 17.

True Deferred Comp is a non-qualified plan.  I believe Line 11 on the W2 form is only for Qualified plans. Sorry I told you the wrong line in the first response.

Regards, 

Laura

[Laura49]

If it is a true Deferred Comp plan then there are no FICA taxes required.  You need to get the actual Deferred Comp agreement and read it.  That is an important step.

[Eaglelion]

I received same message - clearly not someone incarcerated; in fact, I don't even know where you would input someone is in fact incarcerated.  My guess is this is a bust and some programming bug.  Hopefully Lacerte is made aware of this.  I'll have to sit on this return for a week or two and perhaps Lacerte will read their own diagnostic and figure out it makes zero sense.  

[sjrcpa]

The incarcerated thing is new in the last couple of days. No one from Intuit has weighed in.