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Note: Today’s guest entry concerning how to reduce your sales commission tax fees, is provided by Kristen B. in the spirit of community service. In today’s uncertain environment every possible tax deduction idea is worth taking the time to research. Links are provided below for your information. The extra layer of caution is to check with your advisor if the suggested steps are right for you.
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As a new sales professional doing your tax return for the first time, you might be wondering how your taxes will be different from previous years. Is it really possible to reduce sales commission tax fees?
Consider the answers to the following questions:
- Will your sales commission affect your tax refund?
- Do you have to pay more in taxes each year?
- Are there additional deductions you can use on your return?
To get a better understanding of the answers to these questions, it’s best to know how your sales commission is taxed each pay period. The knowledge will give insight on how to reduce sales commission tax fees. Since your sales commission is different from your regular wages, it’s taxed a little differently. It’s a wise investment of time to research how you can reduce your sales commission tax fees
What is Considered a Sales Commission?
Any payments you receive for making a deal or hitting a quota is considered a sales commission. The commission can be a specific flat rate per sale or a percentage of a dollar amount. The Internal Revenue Service (IRS) categorizes sales commission as an Eliminate: supplemental wage.
Other forms of compensation can include bonus checks, severance pay, paid-time-off, and other monetary prizes. Any payment outside of your regular salary can fit into this category.
How is Your Sales Commission Taxed?
A number of factors determine the tax rate for your commission:
- Commission Payment Method:
For any commission under the $1 million mark, your tax rate will be decided by how you receive your commission. In other words, are you paid commission weekly or bi-weekly with your salary, or are your paid commission monthly or even quarterly?
2. Commission Separate from Wages:
If your commission is paid separately from your regular wages and identified as a supplemental wage, then your employer may withhold taxes in one of two ways:
3. The Percentage Method
The method is when your employer withholds your commission at a flat rate of 25%.
4. The Aggregate Method
Your commission is combined with your regular wages as if it was a single payment. Your employer will then use your wages to calculate the entire number of withholdings from the total amount. For example, if your salary is taxed at a 35% withholding rate, then your commission would be taxed at that same 35%.
Commission Included in Wages:
If your employer pays commission with your regular wages, then the supplemental wage rate does not apply. Instead, your withholding rate is calculated with the information provided in your W-4 form.
Why is the Sales Commission Taxed like this?
Since sales commission is a supplemental wage, the IRS taxes it on top of your regular earnings. Your employer also withholds Eliminate taxes for Social Security and Medicare, just like any other form of income. While sometimes it may feel like most of your commission goes to taxes instead of your bank account, there is a simple reason for it. The more commission you make, the more withheld for taxes, and in most cases, you will see a good portion of it again in your annual tax refund.
Reduce Your Sales Commission Tax Fees with These Tips
No matter how your employer pays a commission, taxes will be withheld from your paycheck. There’s no avoiding it, but there are ways to potentially reduce your sales commission tax fees. Preparation goes a long way:
- Filing a New W-4
If your W-4 form is out of date or incorrect, you could be claiming too many allowances and paying less into taxes than what you should be. When you go to file your tax return, you could owe a substantial amount of money to the IRS. However, you also don’t want to have the opposite problem and be claiming too few allowances on your W-4. That could cause a tighter budget than necessary during the year. In either case, consider filling out a new W-4 at the beginning of the year to reflect your current lifestyle and budget better. You can even use a tool like the IRS allowance calculator to estimate better the number of allowances you should claim.
2. Donate to a Charity
If you are close to moving up a tax bracket at the end of the year, consider donating to your favorite charity. The donation not only gets you a tax break but can keep you from moving up a tax bracket and paying higher income taxes. Plus, you can feel good while doing it as you help an organization make the world a better place.
There are several tax deductions that sales professionals can claim at the end of the year. Of course, these depend on the type of position you hold and how you spend money on the job. Some of the standard tax deductions you could claim with the proper documentation include vehicle mileage, food or lodging expenses, and home office deductions.
Prepare Yourself Financially
On the other hand, if it’s too late to avoid paying additional taxes at the end of the year, you should prepare yourself financially. It’s a lot less painful to do taxes when you know you have money set aside for them. Consider reducing costs through using a no-fee financial service to be able to stash away money towards your taxes without having to pay maintenance or balance costs. Plus, if it turns out you owe less than expected, you have instant savings ready to be spent on something else.
While the process of taxation on your commission might seem complicated, it can be a beneficial subject to learn more. By planning, you can save yourself time and money when preparing for tax season. Keep track of your earnings and use all your available deductions to make the most of your tax refund.
Today’s Blog is provided to financially help you achieve The Smooth Sale!
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