Taxation of Deferred Compensation Law

Deferred compensation refers to income that an employee earns but agrees to receive at a later date, typically post-retirement. Under payroll tax law, this income is usually taxed when it is received, not when it is earned, allowing employees to potentially lower their current tax burden. However, payroll taxes, such as Social Security and Medicare, are applied when the compensation is deferred, ensuring that contributions to these programs are made, even if the employee isn’t currently receiving the payment. This ensures fairness in the tax system and helps fund essential benefits for workers.