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Discussion:W2 Code Z

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Discussion Forum Index --> Tax Questions --> W2 Code Z


Ctown0828 (talk|edits) said:

30 January 2007
Client has Code Z on W2 with amount of $3500. Understand there is a 20% additional tax on this amount plus interest. How is the interest figured?

Chautauqua (talk|edits) said:

30 January 2007
There is additional tax, but I don't know the rate. Why interest? See Section 5 of Publication 15-A.

Chautauqua (talk|edits) said:

30 January 2007
It looks like 20% is the correct additional tax rate on NQDC - Nonqualified Deferred Compensation Plans.

Ctown0828 (talk|edits) said:

31 January 2007
Here is what I found on the IRS Web Site:

B. Calculation of Additional Tax under § 409A(a)(1)(B)(i)(I) Section 409A(a)(1)(B)(i)(I) provides that if compensation is required to be included in gross income under § 409A(a)(1)(A), the tax imposed on such income is increased by the sum of two additional taxes equal to the amount of interest determined under § 409A(a)(1)(B)(ii) plus an amount equal to 20% of the compensation which is required to be included in gross income. Section 409A(a)(1)(B)(ii) provides that the amount of interest 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.

Section 885(d)(1) of the Act provides that § 409A generally applies to amounts deferred after December 31, 2004. Section 885(d)(2)(B) of the Act provides that amounts deferred in taxable years beginning before January 1, 2005, shall be treated as amounts deferred in a taxable year beginning on or after such date if the plan under which the deferral is made is materially modified after October 3, 2004. Accordingly, for purposes of the calculation of the additional tax under § 409A(a)(1)(B)(ii), taxpayers may treat amounts deferred under a plan that were originally deferred on or before January 1, 2005 but became subject to § 409A due to the material modification of the plan after October 3, 2004 as deferred on January 1, 2005.

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