What is 'deferred compensation'?

Deferred compensation refers to a portion of an employee's income that is set aside and paid out at a later date, rather than at the time the work is performed. This can be an arrangement that benefits both the employee and the employer, as it allows employees to defer income to a future period, often for tax benefits or retirement savings. By delaying the receipt of income, employees may potentially lower their current taxable income, as taxes on that income are often applied when the funds are actually received.

The context of deferred compensation is important in payroll and taxation, as these amounts are usually addressed in a contractual agreement. They are often used in retirement plans, stock options, and other financial arrangements where compensation is contingent on the completion of certain conditions or reaching specific future dates.

In contrast, the other choices do not accurately describe deferred compensation. Benefits paid in advance do not align with the core concept of delaying payment. A tax credit is unrelated as it pertains to direct reductions in tax liability rather than the timing of income payment. Lastly, calculating overtime pay is a distinct function within payroll that deals with wage calculations based on hours worked, which does not involve deferring payment. Understanding these concepts allows individuals in payroll roles to navigate financial compensation effectively.