How to Report Deferred Compensation on Your Tax Return

To report deferred compensation on your tax return, move the numbers from the form your plan or employer issued to the matching line on Form 1040. Qualified plan distributions arrive on Form 1099-R and flow to Lines 4a and 4b (pensions and annuities) or 5a and 5b (IRAs). Nonqualified deferred compensation paid through payroll appears in Box 1 of your W-2, with Box 11 isolating the deferred piece, and rides along with your regular wages to Line 1a. When there is no W-2, nonqualified payments go on Schedule 1, Line 8t. Any early withdrawal penalty, missed RMD, or Section 409A violation tax is calculated on Form 5329 and carried to Schedule 2, Line 8.

Reporting Qualified Plan Distributions

Distributions from a 401(k), 403(b), governmental 457(b), or traditional IRA come to you on Form 1099-R. Three boxes drive the return.

Box 1 shows the gross distribution.
Box 2a shows the taxable portion. It will be lower than Box 1 if you have after-tax contributions creating basis.
Box 7 carries the distribution code identifying the type of payment: normal, early, disability, rollover, and so on.

Pension and annuity amounts go on Form 1040, Line 4a (gross) and Line 4b (taxable). IRA amounts use Lines 5a and 5b.¹

When Box 2b Is Checked

A checked Box 2b (“Taxable amount not determined”) means the plan administrator couldn’t compute how much of the payment is taxable, usually because you have after-tax basis in the plan. Use the Simplified Method worksheet in the Form 1040 instructions to find the tax-free portion of each payment. The method divides your total after-tax contributions by an age-based number of expected monthly payments to produce a fixed monthly exclusion. Once your cumulative exclusions equal your basis, every later payment is fully taxable.²

Rollovers

A direct rollover typically carries Code G in Box 7 (Code H for a designated Roth-to-Roth IRA rollover), and Box 2a should be zero. Enter the gross amount on the applicable 1040 line and write “Rollover” next to it so the IRS sees the payment but treats it as nontaxable.³

An indirect rollover is different. The check came to you and you redeposited the funds into a new plan or IRA within 60 days. Box 2a may show the full amount as taxable. On your 1040, subtract the amount you rolled over so only what you kept (if anything) is taxed. Skip this step and the IRS treats the entire distribution as ordinary income.

Reading Your W-2 for Nonqualified Deferred Compensation

Nonqualified plan distributions paid through payroll are already inside Box 1 of your W-2, and they carry to Line 1a of your 1040 with the rest of your wages. Federal tax withheld appears in Box 2 and flows to Line 25b.

Box 11, labeled “Nonqualified plans,” isolates the portion of Box 1 that came from a nonqualified deferred compensation or nongovernmental 457(b) plan distribution. The Social Security Administration uses Box 11 to identify prior-year earnings for benefit calculations.⁴ A distribution shown in Box 11 should appear in Box 1 but not in Box 3 (Social Security wages) or Box 5 (Medicare wages), because FICA was already applied when the compensation vested. If the same distribution appears in Boxes 3 and 5, ask your employer for a corrected W-2 before you file.

Box 12 uses letter codes to identify specific deferral and contribution types. The ones most commonly tied to deferred compensation:

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 generally excluded from Box 1 because those contributions already reduced your taxable wages for the year. Codes AA and BB reflect Roth contributions and are already inside Box 1 because Roth money goes in after tax.⁵ You don’t add Box 12 amounts to your income; they are informational, telling the IRS how Box 1 was built.

Roth Designated Account Distributions

A qualified distribution from a designated Roth 401(k) or 403(b) account is fully tax-free. To qualify, the distribution must occur after age 59½ (or on account of death or disability) and after a five-tax-year waiting period that starts with your first Roth contribution to the plan. On a qualified distribution, the 1099-R will show the gross amount in Box 1 and zero in Box 2a. Report the gross on Line 4a and zero on Line 4b.³

If the distribution isn’t qualified, only the earnings portion is taxable. Your Roth basis, shown in Box 5 of the 1099-R, always comes out tax-free. The taxable earnings may also be subject to the 10% early withdrawal penalty.

Early Withdrawal Penalty and Missed RMDs

Distributions before age 59½ generally carry a 10% additional tax on top of regular income tax. The 1099-R will show Code 1 in Box 7 when the plan doesn’t know whether an exception applies.³ The 10% tax goes on Schedule 2 (Form 1040), Line 8.⁶

Several exceptions eliminate the penalty. If you separated from your employer during or after the year you turned 55 (age 50 for public safety employees of a state or local government), distributions from that employer’s plan are penalty-free.⁷ Other exceptions cover disability, substantially equal periodic payments, and qualified birth or adoption distributions. When Code 1 appears but an exception applies, file Form 5329 to claim it.⁸

Missed required minimum distributions use the same route. The excise tax on the shortfall is 25%, dropping to 10% if you correct within two years, and is reported on Form 5329. The IRS can waive the penalty if the shortfall resulted from reasonable error and you’ve fixed it.⁹

Excess Deferrals

Contributions above the annual elective deferral limit must be distributed back to you by April 15 of the following year. A timely corrective distribution means the excess is taxed in the year of the original contribution, the earnings on that excess are taxed in the year they’re distributed, and no 10% penalty applies. The corrective payment comes on a 1099-R.¹⁰

Miss the April 15 deadline and the excess is taxed twice: once in the year you contributed it and again when it finally comes out. The late distribution may also trigger the 10% early distribution penalty and mandatory 20% withholding. This trap is common when you change employers mid-year and each plan takes deferrals up to the limit without coordinating.

Section 409A Violations

When a nonqualified plan fails Section 409A’s timing rules, all vested deferred compensation under the plan becomes taxable immediately, plus a 20% additional tax on that amount, plus interest at the underpayment rate plus one percentage point running from the year the amount was first deferred.¹¹

For employees, the includible amount lands in Box 1 of the W-2 and is flagged with Code Z in Box 12.⁴ You compute the 20% additional tax and interest yourself and report both on Schedule 2 (Form 1040), Line 8.⁶ For non-employees, the 409A violation amount is reported in Box 15 of Form 1099-MISC, and the same additional tax and interest apply.¹²

Most 409A failures come from employer plan design or operational errors, but the tax falls on the recipient. If you receive a W-2 with Code Z, talk to a tax professional. The combined income tax, 20% penalty, and interest can approach half the deferred amount.

When There’s No W-2

Nonqualified deferred compensation sometimes arrives outside payroll. A beneficiary who inherits deferred compensation from a deceased participant, or a former employee receiving payments that aren’t run through payroll, uses Schedule 1 (Form 1040), Line 8t: “Pension or annuity from a nonqualified deferred compensation plan or a nongovernmental section 457 plan.”¹³ The Schedule 1 total then flows to Form 1040 as additional income. Inherited deferred compensation is income in respect of a decedent, taxable to the beneficiary when received, and may qualify for a deduction if federal estate tax was paid on the same amount.

Partners and S-corporation shareholders receive deferred compensation on Schedule K-1 (Form 1065 for partnerships, Form 1120-S for S-corps) rather than a W-2. It may appear as guaranteed payments or as part of the distributive share of ordinary business income.¹⁴ 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 the plan and their role.

Independent contractors receive deferred compensation on Form 1099-NEC, Box 1, once yearly payments reach $600.¹² Report it on Schedule C and figure self-employment tax on Schedule SE.

Multi-State Situations

If you earned deferred compensation in one state and receive the payout after moving to another, both states may claim the income. The source state (where you performed the services) may tax it as source-state earnings, which can require a nonresident return there. Your new resident state also taxes it as part of your worldwide income but should give a credit for taxes paid to the source state.

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

Nonqualified deferred compensation can also fall under this federal protection, but only if the payments are structured as substantially equal periodic payments over at least 10 years or over your life expectancy, or if the plan exists solely to provide benefits above the limits imposed on qualified plans.¹⁵ A lump-sum nonqualified payout that meets neither condition has no federal shield, and the source state can tax it. Nonresident filing thresholds vary; some states require a return for any income earned there, others set minimum dollar amounts.

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