title: Deferred Compensation: A Smart Tax Strategy for High-Income Earners

One of the biggest challenges for high-income earners is managing when and how their income is taxed. If all your compensation arrives in a single year, it can push you into the highest brackets—resulting in a massive tax bill. That’s where a Deferred Compensation Plan comes in.

By deferring part of your income into the future, you can smooth out your taxable income, reduce your current tax liability, and potentially pay taxes later at a lower rate.

What Is Deferred Compensation?

Deferred compensation is an arrangement between you and your employer (or your own business, if you’re self-employed) to postpone part of your salary, bonus, or commissions until a future date.

Instead of receiving the income now, you choose to receive it later—often in retirement, when your taxable income may be lower. This gives you flexibility and control over your tax exposure.

Why This Strategy Matters Now

With top federal tax brackets at 37%—and discussions in Washington about future tax hikes—deferring compensation can be a valuable way to manage income timing.

The Big Beautiful Bill hasn’t changed how deferred compensation works, but it has created new opportunities for high earners to combine it with other strategies (like solar credits or charitable planning). Together, these tools give you more control over how much tax you pay each year.

Who Can Benefit From Deferred Compensation?

This strategy is best suited for:

• Executives and key employees with large annual bonuses.
• Business owners who can structure their own compensation agreements.
• High-income earners approaching retirement who want to shift taxable income into future years.

How It Works in Practice

1. Establish a written agreement with your employer (or your business).
2. Choose what to defer—a portion of salary, bonus, or commission.
3. Set the payout schedule—lump sum or installments, often starting at retirement.
4. Pay taxes later—income is not taxed until you actually receive it.

Because these are “non-qualified” plans, there aren’t strict contribution caps like with 401(k)s. But compliance is critical—you must follow IRS rules carefully.

Pros and Cons of Deferred Compensation

Pros

• Reduces taxable income in high-earning years.
• Defers tax liability to a future (potentially lower) bracket.
• Flexible design compared to qualified retirement plans.

Cons

• Assets may be subject to employer’s creditors.
• Requires strong confidence in your employer’s financial stability.
• Income tax is only delayed, not eliminated.

Deadlines to Keep in Mind

• Elections to defer compensation typically must be made before the start of the tax year when the income is earned.
• Payout schedules must comply with IRS rules—changing them later is very limited.

Final Thoughts

Deferred compensation gives high earners the power to take control of their tax timing. By shifting income into future years, you can avoid spikes in taxable income and better plan for retirement.

When combined with other high-income tax strategies—like buying solar credits or setting up a cash balance plan—deferred compensation can be a cornerstone of an effective tax plan.