Teacher Pay Options

[effigies]

I am a teacher and have the option to receive my salary evenly distributed throughout the year or only during the dates I work (meaning I would not receive checks in the summer). To be clear, 100% of my teaching salary goes directly towards retirement. I do not need the money to pay for my daily life.

Currently, I receive my salary divided equally over 12 months because people said I would pay less on taxes. Unsure if this even true and I'm not quite savvy enough to know how to check on this. However, I'm curious if someone more knowledgeable on this could advise whether it would be wise to keep my pay distribution as is or file to receive 100% of my earning each pay period (in order to invest that amount quicker)?

[Morning Glory]

It doesn't matter. You will pay the same amount of taxes either way, and the difference in investing is negligible. I would ask about other pretax deductions like health insurance: do they just take more out during the school year if you do the nine month appointment, or will you have to pay in for those during the summer?

[Sibley]

The people who say you pay less on taxes have no idea what they're talking about, or how taxes work. Ignore them please. Get paid under whichever option is better for you, it doesn't matter for taxes.

You may, depending on how the school does payroll, have slightly more or less withheld depending on how you're paid. This is pretty common with bonuses actually, where the payroll system will withhold as if the bonus is the regular salary. At the end of the year however, when you file your taxes it's (extremely oversimplified) taxable incomes times tax rate (really, really, really oversimplified. There's not one tax rate that you pay, it's actually different based on how much income you have and I'm slightly feverish from a vaccine so don't want to type how the graduated income tax works).

Anyway, total tax minus what you withheld is what you either have to pay or get returned to you, depending on if you over or under withheld. If you have way more than your tax liability withheld then you're giving the government an interest free loan. If you withhold way less then you may owe penalties. But it all comes down to the totals and get trued up when you file your taxes.

[effigies]

Great points from both you! Thanks.

I will take the healthcare deduction and tax suggestions into consideration.
Planning to call the payroll department on Monday.

[Dr. Pepper]

With the time value of money there is a slight advantage to taking the money during the time your working vs spreading it out over the entire year. To my knowledge there is no disadvantage from a tax standpoint.

[maizefolk]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

[Cranky]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

When dh retired this year, they did indeed pay up all of his banked summer salary (plus his unused sick pay.)

[Frizzle42]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

This is a great question that I've wondered about too. I am a teacher in a district that hired me on a "temporary grant based" position that only lasted a year, and the salary spread continued through the summer when I wasn't technically working for them anymore. Not sure how it would play out if you are fired or leave on less than friendly terms, but I would imagine they are supposed to give you the back pay. then again, "supposed to" isn't always what happens. If it's something you're concerned about, I might ask your local teachers union if they know how situations like that are handled.

[facepalm]

To be clear, 100% of my teaching salary goes directly towards retirement. I do not need the money to pay for my daily life.

Teacher here. Question, are you taking that 100% and putting the maximum(s) into your district 403/457 plans?

If it were me, I'd take my salary over 9 or 10 months.

[dhc]

There is actually a small tax implication, but not what the people you've heard it from are thinking: in a year in which you switch from 12 months of paychecks to 9 months of them, you will probably earn and be taxed on slightly more than 1 year's worth of pay (something like 2/3 of the school year ending in the spring for January-August, plus 4/9 of the next school year's for September-December). At least, that would be my assumption; I'm not a teacher and have never had such a choice to make.

[rmorris50]

One thing I’ve learned over life is just how much everyone wants to control your money one way or other, and limit/discourage access to it. The only reason to not take it when earned is because you don’t trust yourself to manage your own cash flow. Since you said you don’t need this for daily living that doesn’t sound like the case here.

All money earned within one tax year gets taxed the same regardless of when paid in that year. The only implication for you is if these two options impact how much money is paid to you in a specific year. But at a teacher’s salary I assume that would have to just be tax noise.

In short I would take it when earned, otherwise you are letting someone else control your money for longer than necessary.


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[cool7hand]

With the time value of money there is a slight advantage to taking the money during the time your working vs spreading it out over the entire year. To my knowledge there is no disadvantage from a tax standpoint.

+1

[effigies]

To be clear, 100% of my teaching salary goes directly towards retirement. I do not need the money to pay for my daily life.

Teacher here. Question, are you taking that 100% and putting the maximum(s) into your district 403/457 plans?

If it were me, I'd take my salary over 9 or 10 months.

Yes, I am maxing it all out, along with my HSA and Traditional IRA.

One thing I’ve learned over life is just how much everyone wants to control your money one way or other, and limit/discourage access to it. The only reason to not take it when earned is because you don’t trust yourself to manage your own cash flow. Since you said you don’t need this for daily living that doesn’t sound like the case here.

All money earned within one tax year gets taxed the same regardless of when paid in that year. The only implication for you is if these two options impact how much money is paid to you in a specific year. But at a teacher’s salary I assume that would have to just be tax noise.

In short I would take it when earned, otherwise you are letting someone else control your money for longer than necessary.

That is what I figured.
When "regular" people often give money advice it is because they are terrible with it (e.g. "credit cards are evil" and the like).
As I've been optimizing my strategies, the 9 month teacher pay year is one concept that fell through the cracks until now.

[effigies]

There is actually a small tax implication, but not what the people you've heard it from are thinking: in a year in which you switch from 12 months of paychecks to 9 months of them, you will probably earn and be taxed on slightly more than 1 year's worth of pay (something like 2/3 of the school year ending in the spring for January-August, plus 4/9 of the next school year's for September-December). At least, that would be my assumption; I'm not a teacher and have never had such a choice to make.

You make a good point.
The first year I file taxes after changing this, I may end with more than 1 year's earnings that time.
However, it will even out by the following one.

[LongtimeLurker]

Taxes are irrelevant, as it will be the same amount in the end, but you should *always* get your money as soon as you can, because of:

A) Time value of money

B) If you get fired, quit, die, or the school burns down/goes bankrupt, you will have already been paid.

[simonsez]

To be clear, 100% of my teaching salary goes directly towards retirement. I do not need the money to pay for my daily life.

Teacher here. Question, are you taking that 100% and putting the maximum(s) into your district 403/457 plans?

If it were me, I'd take my salary over 9 or 10 months.

Yes, I am maxing it all out, along with my HSA and Traditional IRA.

Very impressive to save 50k+ per year on a teacher salary (regardless if you're living off of it or other monies for your livelihood), kudos!  That takes discipline, sounds like whichever teacher pay option you take, you'll be alright.

[effigies]

To be clear, 100% of my teaching salary goes directly towards retirement. I do not need the money to pay for my daily life.

Teacher here. Question, are you taking that 100% and putting the maximum(s) into your district 403/457 plans?

If it were me, I'd take my salary over 9 or 10 months.

Yes, I am maxing it all out, along with my HSA and Traditional IRA.

Very impressive to save 50k+ per year on a teacher salary (regardless if you're living off of it or other monies for your livelihood), kudos!  That takes discipline, sounds like whichever teacher pay option you take, you'll be alright.

Thanks!
I'm still able to continue working at my previous career on the weekends and throughout the summer. It has more flexibility than teaching and pays for my daily life expenses (plus, I live very frugally). Eventually, I'll cut out one of these jobs in the next couple years before becoming completely burnt out.

By the way, I reached out to the accounting department and put in the paper work to change the pay frequency to 9 months.  Another small example of the aggregation of marginal gains. This is a marathon after all.

And thanks to everyone else chipping in with advice!

[clarkfan1979]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

This kind of happened to me regarding health insurance. I got another offer to teach at another college closer to home and I accepted the job. I called HR and asked about pay and health insurance if I gave my resignation in July (11th month), instead of August (12th month). They told me that my pay would not change, but my health insurance would be immediately cancelled on the following paycheck. We got paid twice/month, so my health insurance would go "bye-bye" within 1-15 days of giving my resignation.

Instead of giving them 30 days notice, I only gave them 15 days notice because I didn't want a gap in health insurance from my old employer to new employer. In my personal opinion, it's a really stupid way of doing it. Under this system, faculty are incentivized to give their notice as late as possible. I wanted to give more notice, but I also didn't want a gap in health insurance.

[Jack0Life]

i get too many people "I hate putting in OT because they take more taxes out of my paycheck"
People need to be more educated on how taxes work.
Not referring to the OP. People in general.

[Morning Glory]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

I can add a data point (fixed-term faculty at non-flagship state school): I'm leaving my job at the end of this semester and just got an email from HR today that I'll get a large lump sum payment for the amount they were holding back for summer. Now I will be able to max out my 457b before leaving !

[maizefolk]

That's a very useful/intriguing datapoint, thanks Morning Glory. Also, congrats!

[JoePublic3.14]

i get too many people "I hate putting in OT because they take more taxes out of my paycheck"
People need to be more educated on how taxes work.
Not referring to the OP. People in general.

Our last oaystub had a paragraph at the bottom about the potential upcoming bonus payouts that happen on 15 December. It states the 'deal' with withholding. 'We are required to withhold blah blah' and it clearly states that that amount may be more or may be less than what would be optimal for your situation so you need to be prepared. I wonder how many people read that.

Up until a decade ago (when some tax law changed) we were able to submit a form and tailor the amount by increasing the amount withheld from the bonus check. That was nice from a flexibility standpoint. Get the dollar amount, do a quick calculation and optimize your taxes.

[Rural]

If it's the same as much "nine over twelve" pay they're paying you a bit less each month starting in the fall and then use that extra to pay you over the summer when, in principle anyway, you're not working.

No tax consequences either way, modest but non-zero investment benefit from getting your month into the market an average of several months earlier.

One x-factor I've never gotten a satisfactory answer from my own employer about: what happens if you quit or are fired part way through the year? Do you get a payout of the money they've been holding back from your paychecks for the following summer?

I can add a data point (fixed-term faculty at non-flagship state school): I'm leaving my job at the end of this semester and just got an email from HR today that I'll get a large lump sum payment for the amount they were holding back for summer. Now I will be able to max out my 457b before leaving !

Will vary by state/system, though. I'm at (what must be) a different non-flagship state school, and the extra withholding for summer benefits is only taken out in spring term, so paychecks in spring are smaller than the ones in fall. We don't have any option to be paid over the summer when we are off contract.

[maizefolk]

However, the arguments get so intense and the amount of money is relatively small, that in practice salary payments and benefits just cease upon date of termination, regardless of which pay play you are on.  We did have one case where someone was willing to fight this, but got bogged down in questions of winter break.  (The "ten month" contract is really nine months of work, with a month in winter off, so are you getting paid for that or not ... it got complicated and the individual in question just said "forget it" and withdrew their grievance.)

Myself, I elect to be paid over the time I work, but I completely understand why people choose the 12 month option.  Even though I'm FI and don't rely on that income for anything, and even though I'm more than capable of budgeting even if I did need it, I still don't like not getting paychecks over the summer.  For most people the 12 month option is the better choice for budgeting ease, even if it means that they will get minorly screwed should they retire/quit/get fired mid year.  I believe the current practice is wrong, but retirees are more focused on retiring, quitters are too focused on where they're going next, and those fired are too focused either on fighting to get their jobs back or dealing with the issues that led to them getting fired in the first place, to care about a month or so of pay.

I have a full three "unpaid months" in the summer: June + July + half each of May and August. The one other place where the weirdness of this comes into play is at the start of the year. It's not uncommon for people to start Jan 1st (spring semester) and occasionally later (my start date was in May, two weeks before the start of "unpaid" summer). At my employer the mandatory "nine over twelve" pay only ever operates on a withholding basis not on a paid in advance one and only on full 12 month periods starting at the beginning of fall semester. If you've negotiated for summer salary as part of your startup great, but for people who don't...

It can be a rude surprise for people, and sometimes a crisis, who, after spending their first few months as a professor getting used to a monthly paycheck, then find out they're not getting paid at all that first summer, THEN finding out that they'll pay paid noticably less per month (75% as much) when their paychecks restart in the fall.

[Morning Glory]

However, the arguments get so intense and the amount of money is relatively small, that in practice salary payments and benefits just cease upon date of termination, regardless of which pay play you are on.  We did have one case where someone was willing to fight this, but got bogged down in questions of winter break.  (The "ten month" contract is really nine months of work, with a month in winter off, so are you getting paid for that or not ... it got complicated and the individual in question just said "forget it" and withdrew their grievance.)

Myself, I elect to be paid over the time I work, but I completely understand why people choose the 12 month option.  Even though I'm FI and don't rely on that income for anything, and even though I'm more than capable of budgeting even if I did need it, I still don't like not getting paychecks over the summer.  For most people the 12 month option is the better choice for budgeting ease, even if it means that they will get minorly screwed should they retire/quit/get fired mid year.  I believe the current practice is wrong, but retirees are more focused on retiring, quitters are too focused on where they're going next, and those fired are too focused either on fighting to get their jobs back or dealing with the issues that led to them getting fired in the first place, to care about a month or so of pay.

I have a full three "unpaid months" in the summer: June + July + half each of May and August. The one other place where the weirdness of this comes into play is at the start of the year. It's not uncommon for people to start Jan 1st (spring semester) and occasionally later (my start date was in May, two weeks before the start of "unpaid" summer). At my employer the mandatory "nine over twelve" pay only ever operates on a withholding basis not on a paid in advance one and only on full 12 month periods starting at the beginning of fall semester. If you've negotiated for summer salary as part of your startup great, but for people who don't...

It can be a rude surprise for people, and sometimes a crisis, who, after spending their first few months as a professor getting used to a monthly paycheck, then find out they're not getting paid at all that first summer, THEN finding out that they'll pay paid noticably less per month (75% as much) when their paychecks restart in the fall.

Mine was the opposite.  I started in January and had my summer pay taken out of spring only, so my paychecks went up in the fall.

[maizefolk]

That sure does seems like a more sensible way to do things.

And while it'd still be hard for people starting out, a paycheck that starts low and increases to it's final value is going to be a lot better for people who live paycheck to paycheck than one that starts high and then decreases.

[charis]

Always take the money when you earn it, unless you need money over the summer, which you don't.  However unlikely a firing or resignation would be, you don't want to be in the position of fighting for pay that you've already earned.  The taxes are the same.

The biggest pro, imo, is getting your money into the market sooner. Trust me, almost none of your colleagues are thinking about that.

[effigies]

Luckily, my school corporation makes it very clear that you will receive all earned pay (in the case of firing or quitting at an awkward time). It's mentioned right on the top of the form where you decide whether to paid for 9 or 12 months. However, as many people pointed out, if your corporation's policy is unclear you would definitely want to have that clarified before making a decision.

Great discussion point!

[charis]

Luckily, my school corporation makes it very clear that you will receive all earned pay (in the case of firing or quitting at an awkward time). It's mentioned right on the top of the form where you decide whether to paid for 9 or 12 months. However, as many people pointed out, if your corporation's policy is unclear you would definitely want to have that clarified before making a decision.

Great discussion point!

While that is probably the policy of every organization, because it's it's illegal to withhold earned income, you are still in a better position if you get paid at the time you earn it.