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Author Topic: Taxes and summer salary  (Read 12931 times)
almost_done
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« on: July 15, 2007, 9:48:47 PM »

I just started my first tt job and received my first paycheck for one-month of summer salary. I was surprised to find no taxes, health insurance, etc., had been taken out of the check. Is summer salary akin to a holiday bonus in industry? Is this standard or unique to my school?

I'm assuming that this amount will still be reported to the IRS as income and hence subject to taxes at year-end. Should one have additional income withheld from the 9-month salary paychecks to avoid a huge tax penalty at time of filing?

I realize these are questions for my tax accountant, but wondered first how other programs and academics handle this.
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icurhere2
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« Reply #1 on: July 15, 2007, 10:12:02 PM »

I have never seen this occur.  Is this part of the annual salary or for summer teaching?  It sounds as if it may be that:

A. Payroll messed up, or
B. You are being paid as an independent contractor for summer pay (have to pay estimated self-employment taxes).
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eddie_haskell
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« Reply #2 on: July 16, 2007, 10:40:36 AM »

I doubt if #2 is the case, but bear in mind that just because someone says you are an independent contractor, that don't mean squat.  There is a whole set of things that determine this, the most important being control.  If the payor controls how, where, and when the job gets done, rather than just the end result, the payee is an employee no matter what the payor tries to get away with.  And, in the case of teaching a class, obviously the university controls when the class takes place, ergo you are not an independent contractor.  They wouldn't have a leg to stand on.  #1 seems much more likely.

But you need to straighten this out ASAP or you may face penalties and interest for being underwithheld.  The current rule is withholding must satisify the lesser of 90% of this year's tax liability or 100% of the previous year's liability to avoid penalties.  By liability I mean the income tax shown on the return, not the amount of the check you wrote.
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bigsky
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« Reply #3 on: July 16, 2007, 11:25:15 AM »

The way it works here is that insurance is taken out during the 9 month academic year. Summer salary should still have benefits (TIAA-CREF contributions, etc.) and taxes taken out. Are you sure it is not categorized as moving expenses or something like that? You need to straighten it out though.
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peitho
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« Reply #4 on: July 16, 2007, 10:59:10 PM »

I'm with everyone else.  Something's hinky, but it's probably an honest mistake.

At my U, they take summer health insurance out of your spring paychecks, but you still pay taxes in the summer.  If this is the case, it's a payroll problem.

Good luck!

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clean
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« Reply #5 on: July 17, 2007, 2:53:37 PM »

Actually, I am going against the crowd.  Since this is your first check from them ever, then you are likely in a very low tax rate.  IF they took out zero for Soc. Sec, or any taxes (fed or state) at all, then it probably is a mistake.  IF it was just a very small number, then it is probably correct and they will even out over the rest of the year.

Let us know, though.

As for insurance, we have a choice of a 9 month or 12 month pay.  If you pick 9, they take the summer insurance cost out of your last check. 

I always recommend that you take the 12.  It is much easier to budget, and as long as you live on that number, you wont HAVE to depend on summer to make ends meet.  It is a great bonus if you get it, but summer is always an additional, iffy contract.

clean
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« Reply #6 on: July 17, 2007, 3:59:55 PM »

I just started my first tt job and received my first paycheck for one-month of summer salary. I was surprised to find no taxes, health insurance, etc., had been taken out of the check. Is summer salary akin to a holiday bonus in industry? Is this standard or unique to my school?

I'm assuming that this amount will still be reported to the IRS as income and hence subject to taxes at year-end. Should one have additional income withheld from the 9-month salary paychecks to avoid a huge tax penalty at time of filing?

I realize these are questions for my tax accountant, but wondered first how other programs and academics handle this.

Can they do that???
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bigsky
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« Reply #7 on: July 17, 2007, 4:05:52 PM »

I always recommend that you take the 12.  It is much easier to budget, and as long as you live on that number, you wont HAVE to depend on summer to make ends meet.  It is a great bonus if you get it, but summer is always an additional, iffy contract.

Clean,
I am surprised you would advocate this since you seem to be pretty on top of things financially! I take 12 months over 9 for the reasons you state. However, I have colleagues that take their salary over 9 months so that they hold onto their money as opposed to the university. Any idea how much more you stand to gain by doing this?
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gayle
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« Reply #8 on: July 17, 2007, 4:07:25 PM »

This sounds hinky to me.  The only logical explanations I can come up with are:

1.  It is a relocation payment.  You can offset this income by documenting your related expenses as deductions on your tax return so the school didn't have to withhold.

2.  It is an advance check rather than a regular check.  Future check(s) will be grossed up (and appropriate taxes withheld) to account for this income.

3.  The payroll system is wicked messed up.


You should definitely find out which of the above applies.
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« Reply #9 on: July 17, 2007, 4:20:32 PM »

Actually, I am going against the crowd.  Since this is your first check from them ever, then you are likely in a very low tax rate.  IF they took out zero for Soc. Sec, or any taxes (fed or state) at all, then it probably is a mistake.  IF it was just a very small number, then it is probably correct and they will even out over the rest of the year.

Let us know, though.

As for insurance, we have a choice of a 9 month or 12 month pay.  If you pick 9, they take the summer insurance cost out of your last check. 

I always recommend that you take the 12.  It is much easier to budget, and as long as you live on that number, you wont HAVE to depend on summer to make ends meet.  It is a great bonus if you get it, but summer is always an additional, iffy contract.

clean

Yes, but you don't have options not to pay taxes or FICA... what's up with that.  In my experience when at a new job, they take out too much FICA because they don't take into account that it's already been taken out in your prior job in the same tax year.

I don't see how any normal academic employer gets away with not withholding taxes and social security.

I'm voting for gayle's option 3.
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bigsky
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« Reply #10 on: July 17, 2007, 4:27:47 PM »

1.  It is a relocation payment.  You can offset this income by documenting your related expenses as deductions on your tax return so the school didn't have to withhold.

I vote for gayle's option 1. Keep your receipts.
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clean
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« Reply #11 on: July 17, 2007, 4:52:55 PM »

Bigsky

Quote
Quote from: clean on Today at 02:53:37 PM
I always recommend that you take the 12.  It is much easier to budget, and as long as you live on that number, you wont HAVE to depend on summer to make ends meet.  It is a great bonus if you get it, but summer is always an additional, iffy contract.


Clean,
I am surprised you would advocate this since you seem to be pretty on top of things financially! I take 12 months over 9 for the reasons you state. However, I have colleagues that take their salary over 9 months so that they hold onto their money as opposed to the university. Any idea how much more you stand to gain by doing this?

I confess that I do take the money in 9 vs. 12.  However, I "am pretty on top of things financially", so I dont have a problem with the budget.  The answer to your question is that I get about $100 before taxes in interest by doing it myself.

However, the money is not really worth  the aggravation.  For example, I have a CD the matures on the 1st of August for my monthly budget draw.  It will have earned all of about $35 extra for interest.  Not that I am turning down the $35, but I will pay taxes on it and Ive had to waste time at the bank while they created the various CDs.  So after all the time Ive spent dealing with it, I think that I would have come out ahead by having the University just send it to me.

I got on the 9 month track at my first job.  There, they taxed you on the lower amount (taxed you as they wrote the check... the cash basis...), and they paid all the summer money on the same day as your last paycheck!  So Id get a bunch of direct deposits all on the same day!

Here at job 2, if you go on the 12 option, they treat everything as though it was the 9 month option (taxes and all) and then take out 25%.  Then they hold it for you, without interest and pay it on the 1st of each month.  I can do the same thing myself, and I have.  Every 3 months I go to the bank and set up a cd that matures pretty close to the first of July, August and September. 

HASSLES:
got to go to the bank and wait for someone to fill out the CD forms.
Got to call the bank and go through phone hell to transfer the CD back to the checking account before they automatically renew it.
I never seem to make it to the bank on the 1st, so my CDs mature on different dates. (not always on the 1st)

Benefits.
About $100 pretax.

I recommend that anyone that is not a "Budgetting Fanatic", or not willing to put up with the hassle, go ahead and take the easy 12 check route. I am considering moving back to it this fall, myself.


So, the answer is about a hundred bucks.  I dont keep track of the time, but it is not 'free money'.

clean

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« Reply #12 on: July 17, 2007, 5:52:24 PM »

I recommend that anyone that is not a "Budgetting Fanatic", or not willing to put up with the hassle, go ahead and take the easy 12 check route. I am considering moving back to it this fall, myself.

I agree! Easier to budget (and so many of us suck at that) and the loss of interest income is immaterial.
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eddie_haskell
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« Reply #13 on: July 17, 2007, 6:16:39 PM »

Actually, I am going against the crowd.  Since this is your first check from them ever, then you are likely in a very low tax rate.  IF they took out zero for Soc. Sec, or any taxes (fed or state) at all, then it probably is a mistake.  IF it was just a very small number, then it is probably correct and they will even out over the rest of the year.
clean
Clean is off base here.  Withholding charts don't work that way.  Say I get hired for $5k a month and I start on Nov. 1, and have been unemployed all year until then.  I will be withheld as if I make $60,000 per year, even though I will only make $10,000.  Also OASDI (Social Security) starts from the very first dollar earned, a flat 6.2%.  Now, some state university systems are exempt from this due to having separate retirement systems, but I don't know of any that are exempt from Medicare (there may be some, but I've never seen it or heard of it), which is also a flat 1.45% of the very first dollar earned.  Moving reimbursement would sure explain it but then wouldn't the gross amount be different from what the OP was expecting?
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eddie_haskell
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« Reply #14 on: July 17, 2007, 6:35:14 PM »

I agree! Easier to budget (and so many of us suck at that) and the loss of interest income is immaterial.
Well, I still don't know if it's material but I love time value of money problems so I assumed a prof making $50,000 a year net of tax (roughly $70,000 gross) and a 6% rate of return (APR) and after 30 years I came up with being almost $25,000 better off taking salary over 9 months instead of 12, and that would be a higher number if retirement considerations were considered.  6% after inflation is pretty doable over a 30 year time horizon, so I think the difference over a whole career could be a new car or a world cruise.
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