Jacob M. Leon, CPA/PFS CFP^®

Notice 2007-89, 2007-46 IRB

In a Notice, IRS has provided interim guidance to employers and payors on their reporting and wage withholding requirements for calendar year 2007 for deferrals of compensation and amounts includible in gross income under Code Sec. 409A . Interim rules on calculating amounts includible in gross income under Code Sec. 409A are also provided. Generally, previous reporting and withholding relief applicable to the 2005 and 2006 calendar years is now extended to the 2007 calendar year.

Background. Under Code Sec. 409A , amounts deferred under a nonqualified deferred compensation plan for all tax years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan meets certain requirements.

Code Sec. 6051 and Code Sec. 6041 require an employer or payor to report all deferrals for the year under a nonqualified deferred compensation plan on Form W-2, “Wage and Tax Statement,” or Form 1099, “Miscellaneous Income.” Under Code Sec. 3401(a), “wages” for withholding purposes include any amount includible in an employee's gross income under Code Sec. 409A . In addition, Code Sec. 6041 requires a payor to report amounts includible in gross income under Code Sec. 409A that are not treated as wages under Code Sec. 3401(a) .

In Notice 2006-100, IRS permanently waived employers' and payors' reporting requirements under Code Sec. 6041 and Code Sec. 6051 for calendar years 2005 and 2006 for annual deferrals of compensation under Code Sec. 409A . The Notice also provided guidance on the calculation of amounts includible in income under Code Sec. 409A , and the application of the employer and payor reporting and withholding requirements for such amounts.

Generally, Notice 2007-89 now extends the previous reporting and withholding relief in Notice 2006-100 for the 2005 and 2006 calendar years to the 2007 calendar year.

New reporting relief. Employers and other payors need not report annual deferrals of compensation that are not includible in income under Code Sec. 409A on Form W-2 or Form 1009-MISC for calendar year 2007.

Reporting includible amounts. Amounts includible in income under Code Sec. 409A for 2007 must be reported on Form W-2 or Form 1099-MISC, as appropriate. The notice explains how employers and payors meet this reporting requirement. For example, employers must report such amounts as wages paid on line 2 of Form 941, Employer's Quarterly Federal Tax Return, and in box 1 of Form W-2. An employer also must report such amounts as Code Sec. 409A income in box 12 of Form W-2 using code Z.

Income tax withholding. The notice explains how to meet the income tax withholding requirements for amounts includible in income under Code Sec. 409A for 2007. Amounts includible in gross income under Code Sec. 409A are supplemental wages for purposes of determining the amount of income tax required to be deducted and withheld under Code Sec. 3402(a) , regardless of whether the employer has paid the employee any regular wages during the calendar year of the payment. The amount required to be withheld isn't increased on account of the additional income taxes imposed by Code Sec. 409A(a)(1)(B) . IRS cautions employees that estimated tax payments may be required to avoid penalties.

Figuring includible amounts. The notice provides interim rules for 2007 on calculating amounts includible in gross income under Code Sec. 409A . They apply to service providers and to employers or other payors who must report and withhold on the amount to be included in income. For example, as spelled out in considerable detail in the notice, the amount includible in gross income under Code Sec. 409A(a) equals: (1) the portion of the total amount deferred under the plan that, as of December 31, 2007, is not subject to a substantial risk of forfeiture as defined in Notice 2005-1 , or the final regs, and has not been included in income in a previous year; plus (2) any amounts of deferred compensation paid or made available to the service provider under the plan during the calendar year 2007.

Protection from future additional reporting or withholding. An employer or payor who complies with the notice's rules for computing amounts includible in gross income under Code Sec. 409A and withholding and reporting for calendar year 2007 won't be liable for additional income tax withholding or penalties, or have to file a later corrected information return or furnish a corrected payee statement, as a result of future published guidance.

Service providers. The notice provides guidance to service providers on their income tax reporting and tax payment requirements for amounts includible in gross income under Code Sec. 409A for 2007. A service provider must report as income and pay any taxes due relating to amounts includible in gross income under Code Sec. 409A for calendar year 2007. For purposes of determining the amount required to be included in income under Code Sec. 409A , the same standards apply to a service provider as apply to an employer or payor when calculating the amount required to be reported as income, provided that an amount is treated as previously included in income only if it has been included in the service provider's income in a previous tax year (regardless of whether reported on a Form W-2 or 1099-MISC).

For more information on how this may affect your tax situation

call me at 713-333-7477

or email me at jacob@thefinancialfirm.com

 

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Posted 11/16/07