Deferred compensation of teachers
The Internal Revenue Service (IRS) has issued guidance clarifying that its deferred compensation regulations, adopted in April 2007, will not change how the pay of some teachers is taxed during the coming school year. Links to the IRS statement, its Frequently Asked Questions document, and the regulations are below. The regulations apply section 409A of the Internal Revenue Code, which subjects "nonqualified deferred compensation"—compensation that is earned in one year but not paid until another and that is not made under a qualified plan like a 401(k) plan—to an additional 20% tax if the employee does not make certain "elections" concerning the compensation. The IRS recently received inquiries about how the rules affect teachers who work during the school year but are paid over 12 months. The guidance explains that (1) school districts do not have to offer employees an election between being paid over the school year and being paid over 12 months; (2) district that chooses to offer such an election need not make changes prior to 2008 and their employees will not be subject to additional tax; and (3) any changes required for 2008 are likely to be minor. If the district requires all employees to have their pay spread over 12 months, § 409A’s election and additional tax rules do not apply. However, starting with the 2008-09 school year, if the district allows an employee with a part-year work period to elect to be paid over 12 months, the employee must notify the district of this election in writing or electronically before the beginning of the school year. By January 1, 2008, school districts that offer elections must "set forth in writing how the teachers [and other employees] are to be paid…" for compensation earned for the rest of the school year.
[IRS press release]
[IRS Frequently Asked Questions]
72 Fed. Reg. 19,234 (Apr. 17, 2007)
[IRS final regulation]