If you have made sales, you have received a commissions check and felt the cold hand of Uncle Sam digging into your paycheck and taking his share. Taxes are a tricky beast to tame.  When you are negotiating your contract, small changes in the classification and how you receive the money makes a big difference in your check.  I asked my good friend and my financial planner Mike Eklund from Financial Symmetry to break it down for the other C students and me.  Since state taxes are unique to each state, we are focusing on Federal taxes.  And as a CYA, please always consult a licensed accountant before making any decisions on your taxes.  This blog will not hold up in court.

Mike’s top three tips:

  1. If possible, get reimbursed through mileage, not a car allowance
  2. Unreimbursed business expenses are no longer tax deductible starting in 2018
  3. Allowances are typically taxable (unless substantiated) while business expense reimbursements are not taxable.

 

Commissions and bonuses paid:

Bonuses and Commissions – are considered “supplemental wages.”  Your commissions and bonuses will always have your state and local taxes plus your social security, Medicare and your standard tax withholding.  For Federal Internal Revenue Service (IRS) it depends on whether it’s included in your regular paycheck or separate.  If your commissions are paid as part of your regular paycheck than taxes will be withheld according to your usual federal and state withholding.  If your commissions are paid outside of your regular paycheck than it is taxed ~25% for federal taxes.   For most people, 25% is more than what they pay on average.  Here is a quick chart from the Tax Foundation if you are wondering what Tax Bracket you fall within. https://taxfoundation.org/2018-tax-brackets/

If you are in the top level tax bracket, the 25% seems like a deal.  Not so fast, the IRS will come after you at the end of the year to get the difference.  Instead of paying your taxes throughout the year, you will have a significant payment at the end of the year.

Expense reports:

Reimbursements – are not taxable if incurred by employees in connection with performing services for the employer.  Essentially, when you fill out your expense report, and the company pays you back, that is not double taxed. A typical example is business-related travel expenses.  Unfortunately, recent tax reform eliminated the ability to deduct unreimbursed employee expenses on schedule A of your tax return.

  • A change in the tax code no longer allows for people who have expenses that are not reimbursed, by the company, be tax deductible on your tax return.  So make sure you do your expense reports and get the money back, because it will no longer come back in taxes.

Car Allowances:

Car Allowances – businesses have the option of either providing a monthly car allowance or mileage reimbursement based on miles driven. A monthly car allowance is taxable income so a $500 monthly allowance could be reduced by over 40% once you consider federal, state and FICA taxes.

Expense reimbursements are not taxable, but allowances are taxable.  Meaning, on your paycheck, if the company puts, $400 allowance for a car, that is taxed.  Whereas, if you submit an expense report with a $400 line item for car mileage, that is not taxable.

  • Mileage reimbursement is more cumbersome as you need to track actual miles driven, but the reimbursement is not taxable.  Here is a link to a blog post that describes the situation.  The summary is companies choose allowances and not mileage reimbursement as it is more straightforward and less of an administrative burden, but more expensive for the employee.

Money Tips

  • The more material changes that happen in your life, kids, marriage, retirement homes, the more difficult it is to get your financial situation under control.  It is better to organize your financial life now.  Check out the Ultimate Financial Checklist for further information.
  • An issue for most salespeople is trying to spend less than you earn.  Easy to say, hard to do.  Instead of buying a round of shots at the bar, here is where you should put that money to start building wealth. Money Can Buy Happiness blog post for the answers.
  • I always tell new hires, no matter how little you make, invest in your 401k.  Your future cannot wait, and it saves you money now.  Contribute to a solo 401(k) if you are self-employed,  your Company’s 401(k) or a Healthcare Savings Account if eligible.  Every dollar contributed can save you up to $0.37 on your federal taxes.