DCCCD: IRS Regulations for Annualized Compensation

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IRS Regulations for Annualized Compensation

HROG Section:	Active Employment and Compliance Policies
Document Title:	IRS Regulations for Annualized Compensation
Initial Date Posted:	May 16, 2008
Applies To:	Employees who work less than a full year
Source:	IRS Code, Section 409A, District Human Resources

Purpose:

Recent changes to income tax rules listed in the IRS Code, Section 409A impose severe penalties on employees who are paid out over 12 months. The IRS has issued new regulations regarding deferred compensation. The regulations state that annualized compensation – such as paying 9-months over 12 months – may be subject to an additional 20% tax. An employee can avoid this tax if the employee elects, in writing, to have his/her compensation annualized.

Definitions:

“Annualized” Compensation refers to spreading compensation payments over a 12-month period. For example, a 9-month employee who elects to annualize his/her compensation will be paid over 12 months, rather than receiving her full compensation during the months of actual service.

Procedures:

All employees working less than a full year are subject to the IRS regulations.
An employee who works less than 12 months and wishes to have his/her salary spread over 12 months, must make a written election to annualize his/her compensation.
The written election must be made by the first day of employment.
The written election must be made at the beginning of each academic year.
Once the written election has been submitted it may not be revoked by the employee.
If an employee fails to make a written election by the first day of work in the new academic year the safest course of action would be to request non-annualized payments (receive pay on a 9- or 10-month basis, as applicable).
If an employee does not wish to annualize his/her compensation (because an employee either prefers to be paid on a 9- or 10 month basis, or because the employee did not sign the annualization form by the first day of work), he/she may choose not to have his/her compensation annualized.
An employee is responsible for timely submitting payments for any portion of benefit premiums during any period they may not receive a paycheck.

Related Links:

Payroll Schedule Election (pdf file)