Are you a 10-month employee who needs your paycheck spread out over 12-months? So am I. Effective this year, IRS Code Section 409A now requires my employer to implement certain rules in the program that they offer. As a result, they are dropping the program. We’re on our own if we want a paycheck over the summer.
Fortunately, our local credit union offers this service for us (and I’m certain other financial institutions would do the same for you). The main benefit is that I now earn the interest on my own money rather than my employer. But how can this be setup so that the two checks I get over the summer are the same amount as during the year? Here’s how:
If you withhold 1/6 of your normal, monthly (net) check amount each month it will yield, after 10 payments, two payments of that same amount (that is, 5/6 of a normal, monthly check). Here is an example:
- Your Monthly, Net salary = $3,000.
- You live off of 5/6, or $2,500 that month.
- You store 1/6, or $500, in a summer cash account.
- 10 months at $500 (1/6 salary) yields a summer cash value of $5,000. Now divide by 2 for the 2 summer monthly installments and you get $2,500 – the same amount you live off of during the earning months.
The math above holds for any salary amount. So, if you want the same amount coming to you during the summer months, (i.e. a stable, consistent salary) you need to withhold 1/6th of your net salary each month in the summer cash account.
Now, just a quick disclaimer. <a-hem> I am not an accountant and I am not responsible for your use or abuse of this information. You may use it in any fashion at your own personal risk. (This is a blog, after all.) I cannot and will not be held liable by providing the above information. Have a nice day!