IRS Erases Fears: Deferred Payment Rules Will Not Affect Virginia Teachers 2007-08 School Year

Teachers in Virginia have frantically been making phone calls, sending emails, and passing information along to their co-workers about changes in the federal tax code that could potentially affect their pay. The overwhelming concern of teachers has been how this will affect them as they are preparing to return to school.

Taking prompt action, the IRS issued a statement on Tuesday that clarifies that the new rules will not affect the upcoming school year in 2007-08. For additional information, the statement is available online at the IRS website. Refer to Frequently Asked Questions: Sec. 409A and Deferred Compensation.

Under the rules of Section 409A an employee who earns income in one year but defers payment until the next year, may be subject to a tax penalty of 20%. The penalty would apply only to the amount of income that was deferred to the future year.

For example, teachers who are 10-month employees but elect to have their compensation paid to them over a 12-month period may have reason to be concerned. If the school years starts in August and ends in May, and a teacher chooses to be paid over 12 months, instead of 10 months, then the teacher actually receives compensation for 5 months in the first year (August-December), but 7 months in the following year (January-July). This would be deferring compensation.

The new rules will only affect school districts that offer employees the option of having their pay dispersed over 10 months or 12 months. Districts whose policy is simply one scale or the other will not be affected.

So, for the moment, teachers have nothing to worry about. At least not this school year anyway. However, teachers employed by a school district who have the option to choose, would be wise to seriously consider how this rule is going to affect their particular situation during the 2008-09 school year.

On behalf of my own household, when my husband returns tomorrow for his first back-to-school information session, he is already prepared to ask a few questions and also share information with his co-workers. Many of the surrounding school districts in our rural area of Virginia do indeed offer their employees the choice between a 10-month or 12-month pay period. The rule changes will certainly affect us next school year, and admittedly we are concerned.

Amid all the various media outlets that I have come across on this topic I have yet to find one that really comes right out and says what is really on the minds of a lot of our hard-working teachers. I'm brazen enough to say it here. We entrust our children into their hands every day and some new tax rule could penalize them? Somehow, that really shouldn't make the grade. Start the school year off with an A - that is, a link to the 409A information. Better than an apple and teachers will thank you for it.