Expert: Arthur Naman - 5/19/2009

Question
I am uncertain how to account for a portion of salary that would be deferred for a long time (say years).  I work for a non profit and with the economic downturn, rather than layoff people, two of our senior admins would like to defer salary. I assume it becomes a long term liability..is it that simple?  Is this enough info?  Thank you.

Answer
I will freely admit that accounting for and taxation of deferred comp is not one of the areas of bookkeeping I have any experience with. With that said I have the following comments.

Given the scenario, that the non-profit financially cannot afford the compensation to be paid currently, this will be a non-funded plan. The employee has only the employer's promise to pay; that promise in unsecured.

You're correct, there needs to be a liability account, but there also needs to be a deferred expense account. Since the salary expense is not paid out currently it not a current period expense.   Accordingly, believe the entries should be something like:

Deferred salary expense                           Debit
Deferred compensation payable                           Credit


The IRS's web site has the following article titled "Nonqualified Deferred Compensation Audit Techniques Guide (02-2005)":        http://www.irs.gov/businesses/corporations/article/0,,id=134878,00.html

This is not simple, please ask for additional assistance if needed. In addition, I would encourage your talking to the accountant who prepares the annual tax return for the non-profit.