Updated September 29, 2026. Quick answer: code Z in Box 12 reports income that became taxable because a nonqualified deferred compensation plan failed the section 409A rules. The same amount is also in Box 1, and the IRS says an additional 20% tax applies on your Form 1040.
What the IRS tells the employer
The instructions define code Z as “Income under a nonqualified deferred compensation plan that fails to satisfy section 409A.” and say: “Enter all amounts deferred (including earnings on amounts deferred) that are includible in income under section 409A because the NQDC plan fails to satisfy the requirements of section 409A.”
Where else it appears
“The amount reported in box 12 using code Z is also reported in box 1 and is subject to an additional tax reported on the employee’s Form 1040 or 1040-SR.”
The additional tax
The special-situations section gives the rate: “This income is also subject to an additional tax of 20% that is reported on Form 1040 or 1040-SR.”
What it is not
Amounts are excluded if they were “properly reported on a Form 1099-MISC, corrected Form 1099-MISC, Form W-2, or Form W-2c for a prior year.” Ordinary deferrals under a compliant plan are code Y, not code Z.
Common mistakes
- Treating code Z like a normal deferral. It signals a plan failure and an additional tax.
- Assuming the amount is only in Box 12. The IRS says it is also in Box 1.
Related: code Y, and 409A distribution elections.
Every code in one place: the Box 12 codes table. If a withdrawal from one of these accounts is your question, see the Form 1099-R Box 7 codes.
Figures verified against the IRS 2026 General Instructions for Forms W-2 and W-3 (Box 12 and special reporting sections) on September 30, 2026.
Sources
- IRS, 2026 General Instructions for Forms W-2 and W-3: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf
- IRS, About Form W-2, Wage and Tax Statement: https://www.irs.gov/forms-pubs/about-form-w-2
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How our partner relationships workCode meanings are read from the IRS 2026 General Instructions for Forms W-2 and W-3 (Box 12) at irs.gov on September 29, 2026. General information, not tax advice. Your own facts decide the outcome, and a payroll professional, a preparer or the IRS is the right place to confirm anything consequential.