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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.
  • There is a difference between what is legal and what a "lot of people do". From the employer's standpoint, the simpliest solution is to just use the Flat Tax method. It is legal, it is easy to understand and it avoids any unnecessary employer responsibility. There are other methods that maybe (but not always) give a better result from the employee's standpoint, but which are a lot harder to do and to explain. These other methods are discussed in Pub 15A. The key is that if an employer just makes up a method (and a "lot of people do"), then the employer can be held responsible by IRS for any underwithheld taxes.

    Let's say that Bob gets paid $500/week, and then receives a quarterly bonus. The quarterly tax table cannot be used as is because Bob has already been taxed 13 times in the quarter for that week's salary/draw. However, we can do the quarterly tax calculation including all wages associated with the quarter (salary plus commissions), less the taxes actually withheld in the prior salary payments, and the difference is an accurate and legal method of determining taxes to be withheld (a variation of the Annualization method). If instead we just use the quarterly table, we are illegally underwithholding taxes, and the employer can be held reponsible for the underwithholding.

    There is a lot said for just using the Flat Tax method. The employer does not have the either the correct information to determine the employee's actual tax liability and also does not have the legal authority to fiddle with the payroll tax withholding to try to match withhholding against the actual tax liability.
  • 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?

  • David WarrenDavid Warren ✭✭✭✭

    First of all, under federal rules the only Commission Paid Only Employees are Outside Salespersons. All other employees are subject to minimum wage, overtime and one of the many Exempt rule sets (of which Outside Sales is one). If you are talking about about any other type of employee, then you are trying to square a circle (make up a set of illegal rules and force your situation into that method). Your decision but IRS knows what the rules are even if the employer does not.

    FUTA/SUTA is something very different. I would say that there is a 99.999999% chance that both the feds and CO consider ALL WAGES as in ALL WAGES to be subject to FUTA/SUTA tax. Making up faux tax law expressions such as "Commission Paid Only Employees" does not change this. I am not saying that there are no exceptions, but these are more like some churches and some schools. That sort of thing.

  • jadegurljadegurl ✭✭✭

    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.

  • David WarrenDavid Warren ✭✭✭✭

    IRS is really clear that taxes are due based on when "constructive receipt" occurs.

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