Link company in the Deferred Compensation Plan

Aug 6th, 2022
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Deferring income to retirement might help avoid high state income taxes (ex: California, New York, etc) if youre planning to move to a low-tax state. The biggest risk of deferred compensation plans is theyre not guaranteed; if your company goes bankrupt, you might receive none of the income you deferred.
Since a 403(b) can be an important component of your retirement income, in addition to Social Security and other investments or savings, experts advise contributing between 10 to 15 percent of your salary and to start as soon as you become eligible.
Accounting for Deferred Compensation Depending on the terms of the arrangement, it may be necessary to record an accrual based on the life expectancy of the employee, as supported by mortality tables, or on the estimated cost of an annuity contract.
Depending on your plan provisions, the payment of the deferred compensation can also be structured to reduce your tax liability based on a series of installment payments or lump sum payments based on a specified time. By spreading out the payments, you potentially could reduce your income for each applicable year.
While there are several steps that must be taken to enter and maintain this type of arrangement, the accounting treatment results in a deferred liability on your books. You record the amount of the deferred compensation on your balance sheet, and it remains there until you pay it out.
Accounts payable represent a liability, or an amount you owe. Liabilities are increased by credits. For accurate accounting books, you must credit your accounts payable the amount of the deferred compensation. This creates a record representing that you still owe the employee money.
One easy way to increase your retirement savings is to contribute a percentage of your income to your Deferred Compensation Plan (DCP) account. Consider saving between 7% and 10% of your salary. The DCP makes it easy for you to save a percentage of your income through the percent-of-pay feature.
2 The payment of the deferred compensation will be reported on a Form W-2 even if you are no longer an employee at the time. You are also taxed on the earnings you get on your deferrals when they are paid to you. The rate of return is fixed by the terms of the plan.
In terms of accounting, deferred compensation is typically recognized as an expense by the company in the period in which the employee performs the service, and it is accrued as a liability on the balance sheet until it is paid out.
Your employer will set aside funds in your deferred compensation plan, and the exact amount will be determined by an agreement. You dont have to pay federal income taxes on the contributed funds until you receive the money at a later date, but Social Security and Medicare taxes could apply.

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