How do I enter amount for Schedule 2 Line 17h (Income you received from a nonqualified deferred compensation plan that fails to meet the requirements of section 409A )

[NT26]

Hi, 

I am using 2021 Turboxtax Premier. 

I calculated what I should enter in Schedule 2 Line 17h.

How do I enter line 17h (Income you received from a nonqualified deferred compensation
plan that fails to meet the requirements of section 409A) using 2021 Turbotax Premier?

Thanks,

[ColeenD3]

What form was the income reported on?

Please see this LINK for the treatment of this income.

Independent contractors

A NQDC plan sponsor does, however, have responsibility to report payments of deferred compensation to its independent contractors. A company will report these amounts to their independent contractors on Form 1099-NEC (Nonemployee Compensation) and 1099-MISC (Miscellaneous Income) as discussed below, and the independent contractors in turn must include these on Schedule SE (Self-Employment Tax) of Form 1040 (U.S. Individual Income Tax Return). For tax years beginning in 2020 or later, the deferrals are reported on Form 1099-MISC, box 12. 

At this time, the reporting of deferrals is optional. In the year paid, employers report NQDC on Form 1099-NEC, box 1.

These rules are summarized in the table here.

[NT26]

Hi ColleenD3,

The income was report in Box 12 of W-2 form (Z code).

2021 Turbotax Premier said that it does not cover 409A (code Z).  Does this mean that I have to get a 1040 form, fill in by hand (including schedule line 17h)  & file via USPS mail instead of via Turbotax ?

Thanks,
NT26

[ColeenD3]

No. You can include it. See this post from @Macuser for how to enter and a screenshot.

[NT26]

I looked at the post from @Macuser

However, I can't locate the exact location where the interview mode questions on the "tax & interest on income received from certain nonqualified deferred compensation plan"" appear using 2021 Turboxtax 

1) I clicked on the "Other Tax Situations" tab

2) Which section/category and its line do I click to get the interview mode questions? 

 

[JulieS · Accepted solution]

This is how to find the interview question that you are looking for:

1. Select Other Tax Situations.
2. Select Miscellaneous tax forms, which is second from the bottom of your list. 
3. Select Additional taxes and repayments at the bottom, click Start to the right.
4. Answer the first question Yes. 
5. Click Continue on the repayment screen.
6. On the screen, Other Taxes, enter your amount in the 4th box, Taxes and interest received on Income Received from Certain Nonqualified Compensation Plans under Section 409A.

[NT26]

Got it!! Thank you.

[alexmeller]

Thank you Jule for the explanations on how to enter the amount - this is still relevant in 2023 (when working on 2022 tax year)

I am however confused with the figure I have to enter. I earned $150 in 2022 by exercising - my employer pays a little reward via Virgin Pulse program - $50 quarterly. Now they reported $150 in box 12, code Z.

I am under impression that I have to enter $150 x 20% = $30. But I am completely unsure if any additional interest is due and how to arrive to the right number. 

Thanks in advance!

[DianeW777]

The code on your W-2 will automatically handle the income.  You will manually enter the tax penalty. You will use the income amount in box 12 $150) to impose the tax rate of 20%. That is your additional taxable income from this nonqualified plan.

• Z: Income under section 409( A ) on a nonqualified deferred compensation plan. This amount is also included in Box 1. It is subject to an additional 20% tax plus interest.

@alexmeller 

[alexmeller]

Thanks, Diane, this is pretty much what I thought, but I have two additional questions:

1. you mentioned that I needed to use 20% of the amount in box 12 Z - that's what I thought too, but what about the interest? It is mentioned everywhere, but I have no idea if it is really needed and how to compute it.

2. Since TurboTax shows an error when it sees box 12 Z (which probably will block me from e-filing), would you advise deleting this entry from W2 in TurboTax?

Thanks a lot again!

[DianeW777]

This is an additional underpayment interest penalty which may not apply to you.  If there is any issue the IRS will send you a bill, which I do not foresee in this situation. 

• For purposes of clause (i), the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.
• US Code Section 409A

The indicator of information for the IRS with box 12, and code Z is the nonqualified amount and alert for the penalty. I can't advise you to delete the entry or leave it blank.  I can say that the amount in box 12 is already included in box 1 as part of your taxable wage. 

Likewise it's unclear as to whether this has different state rules.  You can check to see if your state wages are the same as the federal amount in box 1. As long as the penalty is calculated and included on your return, it's likely there would be no change to the tax return.  Keep all documentation and records with your tax return file.

@alexmeller 

[alexmeller]

Thanks, Diane,  your answer is clear on the money part. On whether to keep the field 12z in W2 or to delete it: I tried to delete it and restore back and it had no effect on any numbers. Apparently TurboTax just ignores the value. Do you know if the values in my W2 are even passed to the IRS as a part of electronic submission? If not, I am thinking deleting the field is the right thing to do since

1. It will allow to remove the error in TurboTax

2. I will enter the additional $30 in Schedule 2, box 17d anyway.

Would you agree? 

And BTW, to your knowledge, is it possible to file the return electronically while TT complaints about an error? If so, leaving the field in W2 is also an option.

Thanks a lot for your help and expertise!

[AbrahamT]

I agree 100%. with you. You can delete the value or just keep in field 12z since the amount is being ignored anyway. As long as you are picking up the 30.00 as Julie S explained and it appears on that Sch 2 Line 17h, you're good to go. And yes, you can go ahead and efile your return while TT fixes this error. 

Lots of luck!

[alexmeller]

Thanks a lot, Abraham and Julie! I will proceed with my filing 🙂