Originally Posted by 1Paul
If you had a very large commission coming-in...say high 6 figures or just above 7 figures...what would you do, legally, to greatly minimize your taxes owed??
it depends; If you are on payroll, your employer deducts the required taxes from your check based on wage plus commissions. If you are self-employed, you file quarterly tax forms with the feds in general, commissions don’t depend on the number of hours you work but just supplemental income. So, UNLESS commissions are MORE than $1M in a given tax year,the payer can either withhold 25% of taxes from your commissions or add your commissions and regular W2 pay together in the pay cycle during which the commissions are received.The payer then figures taxes using the usual tax tables and the information included in your W-4. The payer then subtracts the taxes that were already withheld from your regular pay in that pay period from the taxes owed on the combined total. The balance is what you’ll pay on your commissions.This can amount to more than the flat 25 % when your commissions are significant as the commissions push your income/ tax bracket up on the tax tables. I mean Your commission is treated as income and the additional income moved you into the next tax bracket.
If you are a self employer, then, your earnings are subject to self-employment tax.the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security /old-age, survivors, and disability insurance and 2.9% for Medicare/hospital insurance. However, you can claim 50% or 57% of your self employment tax on your return; the first $117K for 2014 of your commissions are subject to the Social Security part of self-employment tax, Social Security tax. However, there is no ceiling on commissions subject to Medicare tax of 2.9%.To save on your taxes,
you may try to maximize your deductions on Sch A of 1040 and nonrefudnable tax credits ;you may also count certain costs as business related expenses.