What Does the NSD Code on a W-2 Mean?

The W-2 form serves as a foundational document for individuals preparing their annual income tax returns. This statement compiles an employee’s annual wages and the amount of taxes withheld by their employer. This article focuses on deciphering a specific code, “NSD,” which may appear on a W-2 form.

Decoding “NSD” on Your W-2

The “NSD” code represents Non-qualified Deferred Compensation (NQDC). This type of employer-provided benefit allows an employee to postpone receiving a portion of their current income until a future date. Such arrangements are structured for later payout, often upon retirement or termination of employment.

The “NSD” code, accompanied by the letter “H,” appears in Box 12 of the W-2 form. The amount reported alongside Code H signifies income that was deferred during the current tax year. This deferred amount is not included in Box 1, which reports an employee’s taxable wages, tips, and other compensation for the current year.

This means the income represented by “NSD” is not subject to current income tax in the year it is deferred. Employers offer NQDC plans as a tool to retain highly compensated employees or executives. These plans provide a way for individuals to defer income and potential tax obligations to a time when their tax rate might be lower.

How Non-qualified Deferred Compensation is Taxed

Non-qualified deferred compensation reported with the “NSD” code becomes taxable when it is paid out to the employee. This payout occurs in a future tax year, as stipulated by the deferral agreement. When the funds are distributed, they are then included in the employee’s taxable income for that year.

Upon distribution, the compensation will be reported on a W-2 form. The distributed amount will appear in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips). At this point, the income becomes subject to federal income tax, along with any applicable Social Security and Medicare taxes.

Internal Revenue Code Section 409A governs NQDC plans. This regulation aims to prevent employees from having “constructive receipt” of deferred income before it is paid. Constructive receipt means the income is considered available to the taxpayer, even if not physically received, making it immediately taxable.

Compliance with Section 409A ensures the deferral is recognized for tax purposes, allowing the income to remain untaxed until distribution. Failure to comply with these rules can lead to immediate taxation of the deferred amounts, plus interest and an additional 20% penalty for the employee. While compliance is the employer’s responsibility, understanding these rules is important for the employee.

What to Do When You See “NSD” on Your W-2

If you encounter the “NSD” code on your W-2 form, no immediate action or special tax form filing is required from you. This code is informational. It indicates an amount of compensation that your employer has deferred on your behalf and that is not currently taxable.

The presence of “NSD” confirms that this specific portion of your compensation is not added to your taxable income for the current year. You should keep your W-2 for your records. Proceed with your tax filing as usual, understanding that the amount reported with “NSD” does not impact your current year’s tax liability.