What is indicated by W-2 Box 12 Code Z?

Box 12 of the W-2 form contains various codes that provide specific information about an employee's compensation and benefits. Code Z specifically indicates income under a nonqualified deferred compensation plan.

Nonqualified deferred compensation plans allow employees to defer a portion of their income until a later date, typically during retirement or a time when they may be in a lower tax bracket. This deferral can lead to tax savings and is often utilized by higher earners or those planning for retirement. When income is reported with Code Z, it not only informs the IRS that this income has been deferred, but it also highlights that this amount may be taxable to the employee in the future when it is actually received.

Understanding the implications of this code is vital for correct tax reporting and planning, ensuring that employees are aware of the tax consequences associated with their deferred compensation.