The Internal Revenue Service is giving employers and “service providers” more time to comply fully with a new tax law that deals with taxation of “nonqualified deferred compensation.”[@@]

The new law, Section 409A of the Internal Revenue Code, affects employees, freelancers and others who certain kinds of deferred compensation through plans that do not qualify as retirement plans under the Employee Retirement Income Security Ac.

In many cases, unless there is a substantial risk that the employees or other service providers might lose the compensation, the new law requires affected service providers to start including the compensation in current taxable income.

The new law officially takes effect for tax years starting Jan.1, 2007, and the IRS says it will not enforce employer reporting and wage withholding requirements for 2005 because it still needs to develop guidance to help employers meet those requirements.

Service providers who pay any taxes due once the guidance comes out will have to pay interest on any underpayments but will not have to pay any penalties, IRS officials say.

The notice is on the Web at http://www.irs.gov/pub/irs-drop/n-05-94.pdf