Income/commission taxing help!!!
 

Guys, I will start this by saying that I am 25 and ignorant about the way commission based income is taxed. I am less than a year into my sales job, and I've put together a proposal worth a lot of money. Honestly speaking, I'd say there is a 75% chance that this promotion, involving 100+ potential clients, nets its full value.

I have the potential to make 50-60k in commission on this one proposal alone. Needless to say, I am nauseous just thinking about it, considering I have to wait until pay day sometimes to just fill my gas tank.

That all being said, I need to know what my options are when it comes to being taxed on it. I am in Kansas, if that makes any difference.

My payout option is up to me. I can take it up front, or stretched out. It can come in one check, or broken into several smaller checks at one time or spread out as well.

The boss-man suggested I take it over a 6-month period if it goes through to help minimize the tax hit.

What would be the best option/s, tax-wise, for me personally if this does indeed go through?

TIA

Don't take it all in one check or it will be taxed out the ass.

It makes no difference on taxes at all as long as you get it all in one year. It makes a difference in withholding. If you take it all at once, the default withholding policy is to assume that you make that amount every pay period and withhold you at the top rate. If you take it over time, the default withholding policy is that you make the smaller amount each pay period, and a more appropriate amount will be withheld.

Having said that, you can control the withholding. It's not set in stone. As long as you can manage your money, you should take the whole thing as soon as possible and arrange to have maybe 25 percent of it withheld in one step. You should get the money in your grubby little hands as quickly as possible.

If you are strictly looking at it tax-wise, then sure, take it over a 6-month period. But I would definitely prefer to have my money now instead of letting someone else earn interest on it.

And it's not clear in your post if you understand that your net tax impact will not change depending on the payout period. I.E., the IRS will take out a chunk in taxes now, but you will get it all back once you file at the end of the year. Your tax bracket determines your total tax liability.

I would definitely like to have the most money, as soon as possible. I have no qualms about managing it.

If it comes in, say, 100 separate checks on the same day, does it withhold at the lower rate, or does it count them all under the same pay period, and thus withhold at the higher rate?

Also, how do I adjust the withholding rate, and what is the ideal rate that I can adjust it to?

Thanks!

Thank you for the clarification on that; I had a pretty good idea that the net tax would be the same, but I've never had more than peanuts anyways so I've never had to spend much thought on it.

I'm more concerned about the initial amount withheld, and if that rate will carry over to future pay periods, in which I make much less.

You just need to tell your boss/bookkeeper/office manager that you want to withhold X percent of it. They may grouse a little bit because you may have to change your W-4, but it's not that big a deal.

The percent depends on your annual income. As a complete guess, I'd bet that 25 percent would be good. It definitely doesn't need to be at 35 percent or whatever the top rate is now, and unless you don't earn anything else this year it'd need to above the 15 percent that's the lower rate, and probably doesn't need to be that middle rate of 28 percent or whatever it is.

Wait, I'll look it up.

If you believe "moneychimp", whatever that is http://www.moneychimp.com/features/tax_brackets.htm, and if you make another $34,000 in other income, this income will be taxed mostly at 25 percent and maybe some at 28. If you'll make less than $34,000 in other income this year, parts of it will be taxed at 15 percent or even zero. So it seems to me like 25 percent is reasonable and somewhat conservative. (And recall that that's just the federal tax. They'll also take out some state tax and FICA and stuff.)

Awesome. Thanks for the help. I will be very disappointed if this was for naught.

It depends on when it goes through. If you don't close until August or something it may be prudent to defer some of that income. I've never done any taxes with commission, and according to GAAP, you'd need to claim it, but if this is a one time thing and there is a way to defer some income, it may be worth checking out.

You should also make sure that you're on their payroll as an employee not a contractor. If they send you a 1099, you'll likely be on the hook for SE taxes. I can't think they'd put you on as a contactor, but like I said, I've never had to fool with commissions.
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Thanks.

I'm a legit employee, non-contracted, thank God.

It/they would close in March at the latest. And yeah, it would be a one-time thing. What exactly would deferring the income do?

The great news is, that if this works, I will be able to roll out the same proposal in 3 other markets as well, with a good chance of closing since the platform is already in place. So I'd have to plan ahead for that as well, tax wise.

baby steps first though.... deep breaths...

Well, it won't matter if you close in March. But if you closed in August and took it over 6 months, you'd take it over sep, oct, nov, dec, jan, feb. Then 20% would be deferred to 2012. That could potentially put you in a lower tax bracket.
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Oh. And good luck. Wish you all the best bud.
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