How to Report Deferred Compensation on Your Tax Return

How you report deferred compensation on your tax return depends on the type of plan: distributions from qualified plans like a 401(k), 403(b), or governmental 457(b) come to you on Form 1099-R and go on the pension and annuity lines of Form 1040, while nonqualified deferred compensation paid by your employer shows up in Box 1 of your W-2 (with the same amount isolated in Box 11) and flows to the wages line. The codes on those forms tell you whether the money has already been hit with Social Security and Medicare tax, whether a penalty applies, and whether anything belongs on Schedule 2 or Form 5329.

Qualified vs. Nonqualified: Two Different Reporting Paths

The IRS splits deferred compensation into two categories, and the forms you receive follow that split.

Qualified plans — 401(k), 403(b), governmental 457(b), traditional IRA — defer income tax until the money is distributed. The administrator issues Form 1099-R for the year of the payout, and you carry the numbers to Form 1040.¹ FICA was already withheld in the year you earned the wages, so the distribution isn’t subject to Social Security or Medicare tax again.²

Nonqualified deferred compensation governed by Section 409A works in reverse on timing.³ Income tax waits until you actually receive the money, but FICA was taken earlier, at the later of when you performed the services or when your right to the money vested. One point that trips people up: vesting alone does not trigger income tax on NQDC. Income tax hits at distribution. When the distribution does arrive, it comes on your W-2, not a 1099-R.

Reporting Qualified Plan Distributions From Form 1099-R

Three boxes on the 1099-R do most of the work:

Box 1 — gross distribution
Box 2a — taxable amount
Box 7 — distribution code identifying the nature of the payment (normal, early, rollover, disability, death)

Pension and annuity distributions go on Form 1040 Lines 4a (gross) and 4b (taxable). IRA distributions go on Lines 5a and 5b instead.⁴ Federal tax withheld (Box 4) carries to Line 25b.

When Box 2b Is Checked

If “Taxable amount not determined” is checked, the administrator couldn’t calculate the taxable portion, usually because you have after-tax contributions in the plan. Use the Simplified Method worksheet in the Form 1040 instructions to figure the tax-free portion of each payment; once your excluded amounts equal your after-tax basis, every later payment is fully taxable.⁵

Rollovers

A direct rollover shows Code G in Box 7 (Code H for a designated Roth to a Roth IRA), and Box 2a should read zero.¹ Report the gross amount on your 1040 and write “Rollover” next to the taxable-amount line.

Indirect rollovers are trickier. If the check came to you and you redeposited within 60 days, Box 2a may show the full distribution as taxable. Subtract the rolled-over portion yourself so only the amount you kept gets taxed; skip this step and the IRS treats the whole payment as ordinary income.

Reporting Nonqualified Distributions From Your W-2

When you receive an NQDC payout as a current or former employee, the employer puts the distribution in Box 1 of Form W-2 and reports the same amount in Box 11 (“Nonqualified plans”). Box 11 exists so the Social Security Administration can see that these dollars were earned in a prior year and already had FICA applied. The distribution should not appear in Box 3 (Social Security wages) or Box 5 (Medicare wages). If it does, your employer has likely made an error and you should request a corrected W-2 before you file.²

Box 1 transfers to Line 1a of Form 1040. Box 2 (federal income tax withheld) transfers to Line 25a. Keep the Box 11 figure in your records as evidence that FICA was already paid, in case the amount later comes under question.

Decoding Box 12 Codes

Box 12 uses letter codes to identify specific deferral and distribution types. The ones most likely to appear:

Code D — elective deferrals to a 401(k)
Code E — elective deferrals to a 403(b)
Code G — elective deferrals and employer contributions to a 457(b)
Code S — salary reduction contributions to a SIMPLE plan
Code AA — designated Roth contributions to a 401(k)
Code BB — designated Roth contributions to a 403(b)
Code Y — deferrals under a Section 409A nonqualified plan
Code Z — income includible because a 409A plan failed to comply, triggering immediate taxation and a 20% additional tax

Amounts under Codes D, E, G, and S are already excluded from Box 1, because those pre-tax contributions reduced your taxable wages for the year. Codes AA and BB are included in Box 1, because Roth money goes in after tax.⁶ Code Y is informational — it tells the IRS what you deferred that year but does not add to current taxable wages. Code Z is a problem; see the 409A section below.

When Nonqualified Compensation Arrives Without a W-2

Some NQDC payments bypass payroll — a beneficiary receiving a deceased participant’s deferred compensation, for instance, or a former employee receiving plan payments years after separation. Schedule 1 (Form 1040) has a dedicated spot: Line 8t, “Pension or annuity from a nonqualified deferred compensation plan or a nongovernmental section 457 plan.”⁷ The total on Schedule 1 flows to Form 1040 as additional income. Inherited deferred compensation is treated as income in respect of a decedent, taxable to the beneficiary when received, with a possible deduction if federal estate tax was paid on the same amount.

Early Withdrawals and the 10% Additional Tax

Distributions taken from a qualified plan before age 59½ generally carry a 10% additional tax on top of regular income tax. Your 1099-R shows Code 1 in Box 7 if the administrator doesn’t know whether an exception applies.¹ Report the 10% tax on Schedule 2 (Form 1040), Line 8.⁸

Exceptions exist. Separation from service during or after the year you turned 55 (age 50 for public safety employees of a state or local government) makes distributions from that employer’s plan penalty-free. Disability, substantially equal periodic payments, and qualified birth or adoption distributions are also exceptions.⁹ If Code 1 appears but you qualify for an exception, file Form 5329 to claim it.¹⁰

Required Minimum Distributions and Shortfalls

Once you reach the required beginning date (currently age 73 for most taxpayers), you must take a minimum amount from qualified plans and traditional IRAs each year. The distribution itself comes on a 1099-R and reports on the 1040 like any other qualified distribution. A shortfall triggers a 25% excise tax on the amount you failed to withdraw, dropping to 10% if you correct it within two years.¹¹ Report the excise tax on Form 5329. The IRS can waive it if you show reasonable error and that you’ve taken steps to fix the shortfall.¹⁰

Correcting Excess Deferrals

If total elective deferrals across all your 401(k), 403(b), or 457(b) plans exceeded the annual limit, the excess must be distributed back to you by April 15 of the following year. A timely correction taxes the excess in the year of deferral and the earnings in the year distributed, with no 10% early distribution penalty.¹² Miss the deadline and the excess is taxed twice: once in the year of contribution and again in the year of distribution, with possible 10% penalty and mandatory 20% withholding. The corrective distribution comes on a 1099-R. This situation most often arises when you changed jobs mid-year and contributed to two employer plans without tallying the combined total.

If You See Code Z: Section 409A Violation

A 409A violation makes all vested deferred compensation under the plan immediately taxable, plus a 20% additional tax, plus an interest charge at the underpayment rate plus one percentage point running from the year of first deferral.³ For employees, the includible amount appears in Box 1 of the W-2 and is flagged with Code Z in Box 12.² You calculate the 20% additional tax and interest yourself and report them on Schedule 2 (Form 1040), Line 8.⁸ For non-employees, the 409A violation amount appears in Box 15 of Form 1099-MISC.¹³

The violation almost always traces to plan design or administration by the employer, but the employee carries the tax bill. The combined hit of income tax, the 20% penalty, and interest can approach half the deferred amount. Code Z warrants a call to a tax professional before you file.

Designated Roth Accounts

Contributions to a designated Roth account inside a 401(k) or 403(b) go in after tax and appear under Code AA or BB in Box 12. They are already included in Box 1, so no further adjustment is needed on your return.⁶

A qualified Roth distribution is tax-free, provided it occurs after age 59½ (or on death or disability) and after a five-tax-year waiting period that starts with your first Roth contribution to that plan.¹ The 1099-R shows the gross distribution in Box 1 and zero in Box 2a. Report it on Line 4a with zero on Line 4b. If the distribution isn’t qualified, the earnings portion is taxable and may face the 10% early withdrawal penalty; your contribution basis (shown in Box 5) comes out tax-free regardless.

Partners, S-Corp Shareholders, and Independent Contractors

Partners and S-corporation shareholders receive deferred compensation through Schedule K-1 rather than a W-2 — on Form 1065 for partnerships, Form 1120-S for S-corps.¹⁴ The amount may appear as a guaranteed payment or as part of the distributive share of ordinary business income. Guaranteed payments to a general partner for services are generally subject to self-employment tax and carry to Schedule SE; treatment for limited partners and S-corp shareholders depends on role and plan structure.

Independent contractors receive deferred compensation on Form 1099-NEC, Box 1, if annual payments reach $600 or more.¹³ Report the income on Schedule C and pay self-employment tax through Schedule SE. A 409A violation amount for a non-employee goes in Box 15 of Form 1099-MISC rather than on the 1099-NEC, and the same 20% additional tax and interest charge apply.

Multi-State Filing

If you earned the compensation in one state and receive the payout after moving, both states may want to tax it. The source state (where you performed the services) can tax the distribution as source-state income, meaning a nonresident return may be due there. Your new resident state taxes the same income as part of your worldwide income but should allow a credit for taxes paid to the source state.

Federal law blocks the source state’s reach for most retirement income. Under 4 U.S.C. § 114, no state may tax retirement income received by a nonresident if the income comes from a qualified trust, a 403(b) annuity, a governmental 457(b) plan, an IRA, or similar qualifying plans.¹⁵ Those distributions are taxed only by your state of residence at the time of payment.

Nonqualified deferred compensation can also fall under this federal shield, but only if the payments are made in substantially equal periodic installments over at least 10 years (or over your life expectancy), or if the plan exists solely to provide benefits above qualified-plan limits.¹⁵ A lump-sum NQDC payout that meets neither test gets no federal protection, and the source state can tax it. Nonresident filing thresholds vary by state, so check the source state’s rules before assuming no return is required.

1
Internal Revenue Service. Instructions for Forms 1099-R and 5498
2
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
3
Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
4
Internal Revenue Service. Instructions for Form 1040 and 1040-SR (2025)
5
Internal Revenue Service. Publication 575 – Pension and Annuity Income
6
Internal Revenue Service. Common Errors on Form W-2 Codes for Retirement Plans
7
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
8
Internal Revenue Service. Schedule 2 (Form 1040) – Additional Taxes
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Instructions for Form 5329 (2025)
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Weren’t Limited to the Amounts Under IRC Section 402(g)
13
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
14
Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
15
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income