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Commissions taxes

Good morning-

I have a question regarding supplemental wages. My company pays commissions to sales employees in the same payroll with their regular pay, but enteres the commissions on a separate check. My understanding of the aggregate withholding method was to allow the taxes to be spread 4 weeks (over the month that the commissions were earned) rather than being taxed at the flat 25% or the regular W-4 rate with the regular biweekly payroll.

Our company in 2007 bought another company and now the sales people are complaining that they owe thousands dollars in underwithheld taxes and that we are calculating the taxes incorrectly. I am not certain what is correct although my ADP client service team says you can process it either way and that a lot of companies spread the taxes over the month earned. Considering that there has been communication to the executive team of my company that we are processing it incorrectly I now need clarification and documentation that we are processing it either correctly or incorrectly. Based on all the research I did 2 years ago I was under the impression I was correct. If you can, please help clarify what is the correct procedure. Thank you. :roll:


  • IRS Publication 15 addresses taxing supplemental wages on page 14:

    There are basically two ways like you said: 25% or the aggregate method. Under the aggregate method, it looks like the time period over which you aggregate is the payroll frequency or the last paycheck, not a full month.

    I am not finding any documentation that you can aggregate over anything longer than a pay period. Hopefully someone else will post if that is available.
  • We have Commission Paid Only Employees. Are Federal and State(Colorado) Unemployment taxes paid against them? When I run a paycheck through QB Payroll I am not seeing either Unemployment Tax showing as a liability?

  • jadegurl
    jadegurl ✭✭✭

    Are you sure they are set up correctly in your system as either a 1099 or as an employee?

    We also have commission only employees but we do not classify them as 1099's we consider them employees based on the duties test and pay them weekly. As such we are liable to withhold all federal and state taxes on every check that we issue. If you have commissioned sales reps you HAVE to pay commissions at least once a month but I have never heard of spreading out your tax liability over more than one pay period.

  • There are so many companies pays commissions to sales employees in the same payroll with their day to day pay.

  • There are some alternative methods described in Publication 15-A Employer's Supplemental Tax Guide. One of these methods is the quarterly average method. (There is not a monthly average method.) Under this method, the employer estimates the amount of pay the employee will earn during the quarter, Divides that amount by the number of pay periods in the quarter and computes the withholding per pay period based on that average. The employer then withholds that amount each pay period regardless of the actual amount the employee earns during that pay period.. The thing is, the employer must also monitor the cumulative earnings for the period and if it appears the estimate is off significantly, then the estimate must be revised for the remainder of the period. Also, the withholding is adjusted to the actual amount required to be withheld for the quarter for the final pay period for the quarter.

    There is also an example in Revenue Ruling 2008-29 (Second example)
    Situation 2. Employee B works as a salesperson for employer Y. Y pays B a monthly salary of $10,000, which it pays on the first business day of the month. In addition to the salary, Y pays B a commission equal to 5 percent of sales. Y pays the amount of accumulated commissions to B each Monday unless the Monday is a federal holiday, in which case the amount is paid on the next business day. Y withholds income tax from the monthly salary paid to B.

    Situation 2. Y is paying B both regular wages (the salary) and supplemental wages (the commissions). Because the regular wages are paid on a monthly basis, B has a monthly payroll period. The frequency of payment of the supplemental wages has no effect on the determination of B’s payroll period because B receives periodic regular wage payments during the calendar year.
    Y may use either the aggregate procedure or optional flat rate withholding to determine income tax withholding on the commissions paid to B. Under the facts here, Y did not pay the supplemental wages concurrently with the wages for the payroll period. Therefore, if Y uses the aggregate procedure, Y may include, in the calculation of the aggregate of regular wages and supplemental wages, the regular wage payments for either the current or the last preceding payroll period. In calculating the aggregate wages, the employer would also include any other supplemental wage payments made for such payroll period. Thus, for example, in determining the correct withholding on the fourth commission payment during a month under the aggregate procedure, Y needs to aggregate regular wages paid for the payroll period plus the three prior commission payments for the payroll period (and any other supplemental wage payments paid for that payroll period) and then apply the applicable monthly payroll table in Publication 15. Because Y has withheld income tax from regular wages paid to B, Y may also use optional flat rate withholding to determine the amount of withholding on the supplemental wage payments to B.

    Just happen to have an example - don't know if it will stay in format when I post.

                Opt Flat Rate                                     Aggregate Method      

    Payment Current Current Month to Date Current
    Date Type Payment Withholding Payment Withholding Withholding
    1-Jun Salary 10,000 1,684.22 10,000 1,684.22 1,684.22
    4-Jun Comm 1,000 220.00 11,000 1,924.22 240.00
    11-Jun Comm 1,200 264.00 12,200 2,212.22 288.00
    18-Jun Comm 800 176.00 13,000 2,404.22 192.00
    25-Jun Comm 1,400 308.00 14,400 2,762.25 358.03
    Total 14,400 2,652.22 2,762.25

    Note that this is the opposite of what you say you appear to be doing - That is not an allowable method unless it qualifies as an employer designed method that withholds within the maximum allowable deviations as described in IRC Section 3402(h)(4) and regulation 31.342(h)(4)-1

  • Nope, didn't work and I can't paste an image.
    Here is a semi-colon delimited version - copy and paste to Excel and then use from the Excel Menu Bar
    Text to Columns
    Select "Delimited" Next
    Select "Semi-colon" Next (Note: unselect any other delimiters that may be checked)
    Select "General" Finish

    Date; Type; Payment; Withholding; Cum Pmt; Agg W/H; W/H for week
    1-Jun; Salary; 10,000; 1,684.22; 10,000; 1,684.22; 1,684.22
    4-Jun; Comm; 1,000; 220.00; 11,000; 1,924.22; 240.00
    11-Jun; Comm; 1,200; 264.00; 12,200; 2,212.22; 288.00
    18-Jun; Comm; 800; 176.00; 13,000; 2,404.22; 192.00
    25-Jun; Comm; 1,400; 308.00; 14,400; 2,762.25; 358.03
    Total; ; 14,400; 2,652.22;;; 2,762.25

  • Note for the table - the first withholding amounts (left) are the optional flat 22% amounts. the three columns to the right are the aggregate method.

  • The first question you should always ask when you hear the word "commissions" is to ask what their FLSA classification is. Unless the employer can PROVE that the employee is somehow exempt, the employee is subject to minimum wage and overtime. A later commission payment would also be subject to overtime. If the employer is claiming that one of 100 or so FLSA exempt classifications exists, then find out exactly which classification they are claiming and whether the related rules are being followed.

    FUTA is always in play unless IRS says otherwise. SUTA is always in play unless the state says otherwise. "Commission" is not a magic word which makes tax law go away