Changes in Receiving Pre-Tax $$ on Deferred Paycheck

[Cheetahwoman7]

Hi everyone,

I just received a letter from my employer that states: as a 10 month employee, I can no long defer my income to receive a paycheck during the two months I'm off. The IRS has a new policy that states it must be POST-Taxed dollars that are used for this purpose. It is based on IRS publication 538: Constructive Receipt.

Basically, as a teacher, you have two options for payment: the 10 month plan that's suppose to pay you an even amount over the course of your employment (your base salary divided by 10); or the 10 + 2 program that takes out pre-tax dollars and holds it for you untill the two months where you don't normally get a paycheck. Taxes are taken out of the money as the check is issued for each of those two months.

I'm not a friend of the 10 month program because actually you don't receive any $$ for almost THREE MONTHS! Your last paycheck is at the end of June, then your next paycheck is at the END of September! That's a LONG time to go without any $$. You can teach during the summer and get a paycheck during that time, but sometimes, you just want the summer off... especially if you're as lucky as I was to teach a 5th/6th grade combination class requiring that I teach both curriculums FULLY in the same amount of time other teachers teach one! My brain needed a break!

I currently use the 10 + 2 method of payment because it saves me $$ on paying some of the fees we have during the year (which are based on our gross monthly income, minus the $$ that are set aside for the 2 months) that are NOT charged during the two month break.

Anyway, I guess what I'm asking is: Would you continue to have your payment system be 10 months plus 2 using post taxed dollars (and no interest that I know of paid on those $$), or would you elect to get all of your $$ as you earn it and then see where you could invest it so it's there when you need it during those two (technically three) months?

[sweeps]

I don't understand why you would have to pay fees if you're paid the 10-month way but not the 10+2 way? I would think if anything it would be the other way around since they are spreading out your paychecks as a convenience. Fees would probably be a bigger consideration for me than the withheld taxes would be.

Perhaps the biggest consideration though is whether you can budget the money to last the whole 12 months if you're only paid 10 (or is it 9?) months out of the year. Many people cannot.

[Cheetahwoman7]

Sweepsplayer, the fees are only charged on the paychecks for the 10 months we're actually working. The summer months' paychecks don't deduct those fees. The fees are based on the gross for the month MINUS the money that's deferred. That's why it saves some $$, probably about $200-$300 a year for me.

My biggest consideration, though, is should I let the "district" hold my money, not give any interest on it, and pay me in the summer? They already float our money as much as they can. We start work the beginning of the third week in August, but don't get a paycheck (on the 10 month plan) until the end of September.

I'm just weighing out my options. At the end of last school year, I didn't even think I was going to have a job due to the shrinking numbers (student wise) at our school. In fact, I wasn't notified until the middle of July that I actually had a job! With all that, I'm trying to budget so that if the same thing happens next year I'll be able to support myself untill I find another job.

[sweeps]

Sorry, this is still fuzzy to me. If you don't defer any money (i.e. you're on the 10-month plan), you don't pay any fees the whole year, correct? Conversely, if you do defer the money (i.e. you're on the 10+2 plan), you pay fees over 10 months for the convenience of getting paychecks in summer. Is that correct?

The extra interest you will earn on getting paid immediately (i.e. 10-month plan) will be fairly small -- especially on a teacher's salary. I am fairly certain that a $200-$300 annual deferral fee will wipe out that interest and then some.

[Cheetahwoman7]

No, you pay fees for the months you work...meaning the 10 months. The difference is that you DON'T pay fees on the deferred income, because it's paid out during the two months you don't work. The fees are based on the gross monthly pay AFTER the deferment for those 10 months.

I know it sounds weird, but working for a school district is weird with what they're able to do to bend the work laws. Things such as breaks are non existant. The only thing that's in the contract is a 30 minute non paid, non-duty lunch. Makes it tough when you have yard duty in the morning and have to find someone to take your place watching the students just long enough so you actually get to use the bathroom! It's one of the reasons that teachers get so many bladder infections.

[Cheetahwoman7]

Oh, I forgot to answer part of your question. If you're on the 10 month payment program, you pay monthly fees based on the total gross income (with no deferment taken out). That's why it costs more in fees to be paid on the 10 month set up. Your gross each month is more, therefore the fees are more.

Does that clarify it?

With this new "restriction" I'll have to pay full fees each month because I can't defer any income, so no annual savings are possible on the fees.

I think I'm going to be put on the straight 10 month program and try to save money each month so that I have enough to make it through the "dry" months. It just irks me to see the district hold on to my money (and alot of other teachers as well), earn interest and float time on it, and then not pay any sort of interest on it while they have it.

If I save $500 a month, that will give me about $5000 for the three months of no $$. That should be enough. *fingers crossed* I just don't know how much more I'm going to net on my paycheck untill after I get the first one. Hopefully, it will be $500 or more. If not, I'll have to figure something else out.

Any suggestions on where to put the money so I make the most interst off of it?

[sweeps]

I *think* I understand what you're saying. Since you aren't charged fees in the summer, you end up paying less fees over a whole year if you go the 10+2 way? In that case, it's going to come down to running the numbers. You'll have to see whether you're saving more from avoiding fees or from the small amount of interest you'll be able to earn.

Check out this post for places to stash your savings if you choose not to defer.

[Cheetahwoman7]

Yes, less fees over the whole year if I'm on the old 10+2 program. Now with the mandated changes, there's NO benefit to staying on the 10+2 program, unless it was to let the district hold my money for me. It's kinda like overpaying on your taxes. You get your money back, but with no interest.

Thanks for the link to the other posts on interest rates.