Deferred Compensation Plan Tax Treatment In Texas
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Multi-State
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US-00418BG
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Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a date after which the income is actually earned. A Deferred Compensation Agreement is a contractual agreement in which an employee (or independent contractor) agrees to be paid in a future year for services rendered. Deferred compensation payments generally commence upon termination of employment (e.g., retirement) or death or disability before retirement. These agreements are often geared toward anticipated retirement in order to provide cash payments to the retiree and to defer taxation to a year when the recipient is in a lower bracket. Although the employer's contractual obligation to pay the deferred compensation is typically unsecured, the obligation still constitutes a contractual promise.
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We'll explain the major state personal income tax considerations that apply to deferred compensation or retirement income. Tax Treatment: The employer gets a deduction when the award is paid to the executive, and the executive is taxed on receipt.Employer contributions made under a salary reduction agreement are deferred from income tax, but are subject to FICA tax. With the tax-deferred 457 plan, your money goes into your account before taxes come out of your check. A 457(b) plan is a tax-deferred retirement savings plan. Funds are withdrawn from an employee's income without being taxed and are only taxed upon withdrawal.