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LSDefine
Simple English definitions for legal terms
deferred compensation
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A quick definition of deferred compensation:
Deferred compensation: This is a way that some companies pay their employees. Instead of giving all the money right away, they save some of it for later when the employee retires. This helps the employee avoid paying too much in taxes. Other ways of paying employees would make them pay taxes right away.
A more thorough explanation:
Deferred compensation is a type of employee compensation where a portion of an employee's pay is set aside to be received at a later time, usually at retirement. This is done to avoid taxes that would be incurred if the employee received the compensation immediately.
For example, let's say an employee earns $100,000 per year and their employer offers a deferred compensation plan. The employee decides to defer 10% of their salary, or $10,000, to be received at retirement. This means that the employee will only pay taxes on $90,000 of their income for that year, instead of $100,000.
Another example of deferred compensation is a stock option plan. In this type of plan, an employee is given the option to purchase company stock at a set price in the future. If the stock price increases, the employee can purchase the stock at the lower price and sell it for a profit. This is a form of deferred compensation because the employee is not receiving the benefit immediately, but rather at a later time.
Overall, deferred compensation is a way for employees to save money on taxes and plan for their future financial security.