FICA Tax: Navigating the Nonqualified Deferred Compensation Special Timing Rule
Compensation is generally subject to federal income tax and FICA tax when compensation is actually paid to an employee. However, nonqualified deferred compensation (NQDC) may be subject to FICA taxation before federal income taxation under a FICA tax special timing rule. The scope of NQDC subject to FICA taxation is broad, including voluntary deferrals of salary, restricted stock units and performance stock units with deferral features, SERPs, and certain deferred bonuses. Understanding when FICA tax applies to NQDC, and how to take advantage of FICA tax timing rules, can help employers avoid errors when administering their NQDC arrangements. Below is a summary of the FICA tax special timing rule and our insights. FICA Tax The Internal Revenue Code imposes FICA tax on compensation employers pay to employees for services. FICA is comprised of two separate taxes: old-age, survivor, and disability insurance tax (OASDI) (commonly called the Social Security tax) and hospital insurance tax ...