How NQDC Calculator Works: Methodology and Assumptions

NQDC Calculator compares two ways to handle the same pay: defer it into your non-qualified deferred compensation (NQDC) plan, or take it as cash, pay the tax and invest what's left in a taxable brokerage account. For every tax year, it builds your household income three times (no change, defer, take the cash) and runs a full federal and state tax calculation on each. What a path costs or gains is the difference between those calculations.

This page explains how that works and what it leaves out, so you can judge the result. It is not a complete tax return, and it doesn't describe any particular employer's plan. For how this differs from simpler tools, see deferred compensation calculators compared.

Three calculations every year

Each year's income is broken out by tax character: wages after pre-tax deductions, other ordinary income, investment income, qualified dividends, capital gains, tax-exempt interest and Social Security. The model calculates tax on that income with no change, with the deferral, and with the cash path.

Because each path gets its own full calculation, the payout, the brokerage account's dividends and sales, and the deferral never borrow each other's brackets or allowances. A large payout year is taxed on top of everything else you have that year, not at a rate you guessed in advance.

Federal tax

Every year is a bracket calculation that includes:

• The standard deduction or your itemized deductions, with the SALT deduction limit worked out from that year's income
• Ordinary income brackets for your filing status
• Qualified dividends and long-term gains stacked on top using the IRS worksheet
• The 3.8% net investment income tax above its threshold
• Capital losses netted at household level, with the $3,000 deduction and carryforward, tracked separately for each path
• Taxable Social Security under the IRS Publication 915 worksheet

Brackets, the standard deduction and gains thresholds widen with your inflation input. Thresholds that are fixed in law, such as the net investment income tax threshold, stay fixed. Future tax law is assumed to stay as enacted, and you can edit the federal tax table in the app.

State tax

Each state with a broad income tax, plus the District of Columbia, uses its own brackets for your filing status, with enacted future rate changes by year and state treatment of capital gains where modeled. Washington's capital gains tax is included. You can enter custom brackets for any state and add a flat local rate.

Before you leave your employer, everything is taxed by the state you live and work in. Afterwards, investment income and retirement withdrawals are taxed where you live. Only the plan payout can also be taxed by your former work state. You choose whether it is, or apply the federal source-tax protection under 4 U.S.C. §114, which generally covers nonqualified plan payments in substantially equal installments over at least ten years. That protection is assumed, not verified. Moving states with deferred compensation explains the rule.

The cash path

On the cash path, the same pay is taxed in the year it is earned and the take-home amount is invested. The account earns your total return, part of it as dividends that are taxed each year before they are reinvested. It is sold in equal fractions on the same schedule as the payout, with long-term capital gains tax at sale.

In every year before payouts begin, both paths leave you the same spending money, so the comparison measures what each path gives back afterwards. Any 401(k) employer contributions you would lose by deferring are added to the cash path as a tax-deferred account paid out on the same schedule.

Payouts, payroll tax and employer credits

Payouts can be a lump sum or annual installments of up to 15 years. In each payout year, the model adds your other income, Social Security and pre-tax retirement withdrawals, so the payout lands in the bracket it actually reaches.

Social Security and Medicare tax on your own deferrals is assumed due when the pay is earned, as on the cash path, so it cancels out. Employer credits are different: the employee share of payroll tax is charged as each credit vests, using that year's Social Security wage base and Additional Medicare threshold.

Employer credit risk

An NQDC balance is an unsecured promise to pay. The model assumes your employer survives each year with probability 1 minus your annual default risk, with nothing recovered in a default, and shows the expected loss. It also finds the break-even annual default risk at which deferring stops paying off.

A shortcut fills the default risk from a credit rating, using long-run average default rates for corporate issuers by rating. It is not a credit view of any company. Read more in NQDC risks and rabbi trusts.

Income cliffs

Some costs jump at income thresholds rather than rising with the bracket. The model works these out every year on both paths:

• SALT deduction limit. The limit and its phase-down above $500,000 of income.
• Medicare IRMAA. Surcharge tiers set by income two years earlier.
• Marketplace premium credits. Including the cliff at 400% of the poverty line.

Optimizer, sensitivity and range of outcomes

• Optimizer. Tests every whole deferral percentage up to your plan's cap against every payout schedule you enter, and suggests a change only if it improves on your current setting.
• Sensitivity matrix. Shows the net benefit across any two assumptions at once, so you can see where the answer flips.
• Range of outcomes. Runs 1,000 simulated worlds. Each draws a market return for every year, an independent chance of employer default each year, and one shift to federal ordinary rates in the payout years. It reports how often deferring wins, the median result and a bad 1-in-10 case. The draws are seeded from your inputs, so the same inputs give the same answer.
• Payout planner. Stacks balances you already have, each with its own payout election, on top of a new one, and tests pushing a payout back five years under the Section 409A rules.

Today's dollars

Results are restated in today's dollars using your inflation input, with an optional extra discount rate. With no discount rate, the result is purchasing power, not a present value.

What the model doesn't capture

• Your plan's actual terms. The deferral cap, payout options, eligible pay, vesting and crediting rates are inputs you supply. Check each one against your plan document.
• The alternative minimum tax, tax credits, the qualified business income deduction, age-based deductions, married filing separately, short-term gains and actual tax lots.
• The limitation on itemized deductions for the 37% bracket.
• State deductions, exemptions, credits for tax paid to other states and reciprocity agreements.
• Local income taxes beyond a flat local rate.
• Medicaid, cost-sharing reductions and employer coverage after you leave.
• Job loss, partial recovery in a default, and markets falling at the same time as a default.
• What heirs receive. Inherited brokerage assets usually get a new basis at death, while unpaid deferred compensation is taxed to the heir as income.

Treat results as estimates for comparison, not a tax return or a recommendation. A qualified tax or financial professional can help you apply them.

Frequently asked questions

How does NQDC Calculator calculate the tax on deferred compensation?

It runs a full federal and state tax calculation for every year on three versions of your income: no change, deferring and taking the cash. The tax effect of deferring is the difference between those calculations, so the payout is taxed on top of your other income in each payout year.

Does it use my marginal tax rate?

Not by default. It works out tax with brackets from your income each year. If you prefer, you can supply your own federal rates for the payout years, and every other year still uses a full bracket calculation.

What does deferring get compared with?

Taking the pay now, paying federal, state and payroll tax on it, and investing the rest in a taxable brokerage account that pays tax on dividends every year and capital gains tax when it is sold on the payout schedule.

Where do the state tax brackets come from?

The base is the Tax Foundation's 2026 state tables, with later enacted changes checked against state sources in October 2026. You can see the brackets in use and enter custom ones in the app.

Is the result tax or financial advice?

No. NQDC Calculator is an educational tool. It produces hypothetical estimates from your inputs and doesn't recommend any election. Your plan document governs your plan's terms.