Independent Commissioned Employee Payroll Question?

Question

I want to be able to pay my sales reps a flat commission of $120 per sale. How do I set it up so the proper taxes are deducted from the commission check, but the rep recieves $120 (not $120 without taxes deducted)

Don't I treat Independent workers differently than employees? Can't I just pay them a commission of $120 and have them worry about their own taxes?

Answer 1

You must first determine if the people you hire are working as employees, independent contractors, statutory employees, or statutory non-employees. If by "Independent Commissioned Employee" you mean a Salesperson, then follow the IRS rules in IRS Publication 15-A, IRS Publication 15, and other IRS Publications regarding their pay:

http://www.irs.gov/publications/p15a/index.html

Failure to correctly classify your workers can make you liabile for the employment taxes due and not collected.

An "independent commissioned employee" is a name you made up. Make sure the definition of your term matches how the IRS classifies different kinds of workers.
http://www.irs.gov/charities/article/0,,id=131138,00.html

By your question, it sounds like you are classifying your workers as employees, and you are willing to withhold the entire amount, employer's portion, and employee's portion of the tax required.

In that case, Pub 15 -A has a few different models you can follow.
"Term of continuous employment.
A term of continuous employment may be a single term or two or more following terms of employment with the same employer. A continuous term includes holidays, regular days off, and days off for illness or vacation. A continuous term begins on the first day that an employee works for you and earns pay. It ends on the earlier of the employee's last day of work for you or, if the employee performs no services for you for more than 30 calendar days, the last workday before the 30-day period. If an employment relationship is ended, the term of continuous employment is ended even if a new employment relationship is established with the same employer within 30 days.

Other methods. You may use other methods and tables for withholding taxes, as long as the amount of tax withheld is consistently about the same as it would be under the percentage method shown in Publication 15 (Circular E). If you develop an alternative method or table, you should test the full range of wage and allowance situations to be sure that they meet the tolerances contained in Regulations section 31.3402(h)(4)-1 as shown in the chart below.
If the tax required to be withheld under the annual percentage
is— The annual tax
withheld under your
method may not differ
by more than—
Less than $10.00--- $9.99
$10 or more but under $100--- $10 plus 10% of the
excess over $10
$100 or more but under $1000--- $19 plus 3% of the
excess over $100
$1,000 or more--- $46 plus 1% of the
excess over $1,000


Formula Tables for Percentage Method Withholding (for Automated Payroll Systems)
Two formula tables for percentage method withholding are on pages 25 and 26. The differences in the Alternative Percentage Method formulas and the steps for figuring withheld tax for different payroll systems are shown in this example.

MARRIED PERSON (Weekly Payroll Period)

If wages exceeding the allowance amount are over $154 but not over $449:
Method: Income Tax Withheld:
Percentage (Pub. 15) 10% of excess over $154
Alternative 1 (Page 25) 10% of such wages minus $15.4
Alternative 2 (Page 26) Such wages minus $154, times 10% of remainder "

Using any of these methods will not guarantee that each employee has $120 after taxes. Everyone has a different tax situation. You shouldn't worry about having the commission equal for everyone after taxes are deducted.


In my opinion, having the commission equal for all employees in a certain group or level is the proper way to compensate them for their work, effort, and achievement.

For example:
100 sales and below, $120 per sale
101 sales to 500 sales, $140 per sale
501 sales to 1000 sales, $155 per sale
over 1000 sales, $168 per sale

Include all their commission in box 1 of their W-2 and deduct taxes accordingly.

Many employers do not want to pay into worker's compensation, or pay the additional insurance programs needed to keep employees. They feel by making their workers pay their own self employment tax, they are automatically considered independent contractors. This is not always the case, and you must be very careful to correctly cleassify the workers you hire.

Their classification depends on their responsiblity, how they handle their assignments, and the way they are treated, not the way you decide to withhold taxes from their income.

The idea that you would want everyone to have $120 per sale after taxes are paid is a noble one, but doesn't fit easily into IRS regulations. It is a socialistic intention that doesn't jive with the capitalistic ideas of the IRS.

:)

Good luck with your business

Answer 2

You're going to go nuts trying to keep track of this since the withholding amounts for each employee is likely to be different. Add to that the fact that the income tax rate is graduated so you'll be paying different commission rates every pay period as the number of sales changes from one pay period to the next.

This is a terrible business model as it is impossible to predict your actual expenses in advance. On top of that, you'd need a full time employee just to keep track of the commissions and run the calculations each payday even with a small sales force.

Once your employees get wind of what you're doing, every one with half a brain will switch their withholdings to Single and zero and maybe even have you withhold extra tax $$$ from each check. Your payroll costs could spiral out of control and wipe out any hope of any profit for your business.

It would make far more sense to kick the gross commission up to $150 or so and let the tax bite fall wherever it does for each employee.

Answer 3

Well, you've got a complex issue with doing that. Here's why.

The social security and medicare taxes are simple. It's done on a percentage, and there is a cap on the amount of social security that is to be collected per employee per year.

However, income tax withholding is a horse of a different color. What happens is that the rate for this tax is based on the employees marital status and number of exemptions claimed on their W-4 that they have filed with your company.

So, if John is single and has no exemptions, his withholding is going to be a lot higher than, say... Angie, who is married and has 3 exemptions on her W-4.

Let's say they both had 10 sales for the month.

Now, I don't have the actual IRS publication for these calculations in front of me, so I'm doing what our math teachers used to do... get a close estimate and go with it, okay? This will still illustrate my point.

Okay so for 10 sales, if you want an even $1200 for the bottom line commission for both employees.

Let's say that for a single person with zero exemptions, the withholding is 10% of the amount over $225. (Yes, they really figure it in a similar fashion to this.)

Now, we already know we'll have to exceed the $1200 amount in order to get the tax issue taken care of. Since I'm a human and not a computer, I'm not really wanting to do all the gazillion calculations needed to get the exact figure, but we'll see how close I can come with a semi-educated guess.

Let's guess that you'll need to start with $1500. The FICA on that will be $114.75. And the federal withholding on it will be 10% of $1275, or $127.50. Where does that put us? $1257.75. Not a bad guess, for the first try.

Re-figuring at $1450 for 10 sales, we get a bottom line for John of $1215.67, federal withholding being $12.50 and FICA being $110.93.

Now, taking Angie's situation.. married with 3 exemptions. Let's say each exemption is $135, so she will be exempt on $405 of her income, and the rate is lower, so 8% of the amount over 225.

In order to get the same bottom line as John on her commissions, Angie's commission has to start out at $1425 for the same 10 sales, and her withholding is $63.60 and FICA is $109.01... with a bottom line of $1252.39.

So, in our example of only 2 employees, we see that the commissions for one will be about $145 while the commission for the other will be close to $138, before taxes.

Most people would soon realize that if they file new W-4's with less exemptions and at the single rate, their commissions will start out higher, and they will possibly receive a tax refund of part of the withheld income tax money... which you will have contributed.

This is a total bookkeeping nightmare because each commission will be different for each employee and each time the commission checks are figured, it will all have to be redone because every item will be different again. Why not just add about $20 per sale to the commission, to cover a portion of the taxes on it, and be done with it? Most people realize that taxes are required to be taken out of commissions, anyway.

Answer 4

You'd have to pay them a commission enough higher than $120 to cover the taxes. And since different people would be in different brackets, and you wouldn't know what bracket they're in, that would be close to impossible. Even THEY might not know their brackets until the end of the year - plus do you really want to pay different gross amounts to different people depending on their tax situation?

This just isn't feasible to do, and probably isn't possible.

Answer 5

It relies upon on the exertions regulations on your state, yet i think of that is not criminal to make somebody artwork over 40 hours a week till they are paid for their time in extra time or comp time. till your husband has some thing in an employment settlement that states in any different case. for the reason that your husband's boss isn't paying him for his added time, i think of you have grounds to document a grievance against the boss. sturdy success!