Base, Commissions, Expenses and Uncle Sam

This post is supposed to be an overview of how to structure and maximize your pay. Navigating the intricate landscape of sales compensation requires a keen understanding of how base salaries, commissions, expenses, and taxes interplay. Mike Eklund, a Partner and Certified Financial Planner™ at Financial Symmetry, emphasizes the importance of structuring your compensation to maximize take-home pay and minimize tax liabilities.financialsymmetry.com

Commissions and Bonuses:

Commissions and bonuses are classified as "supplemental wages" by the IRS. If these are disbursed separately from regular paychecks, federal taxes are typically withheld at a flat rate of 25%. For individuals in higher tax brackets, this rate may be advantageous during the year, but it's crucial to prepare for potential additional tax liabilities when filing annual returns.

Expense Reimbursements:

Reimbursements for business-related expenses are generally non-taxable, provided they are directly connected to job performance. However, with recent tax reforms, unreimbursed employee expenses are no longer deductible on personal tax returns. Therefore, it's essential to diligently submit expense reports to ensure reimbursement and avoid out-of-pocket losses.

Car Allowances vs. Mileage Reimbursement:

Employers may offer a monthly car allowance or reimburse mileage. A fixed car allowance is considered taxable income, potentially reducing its value by over 40% after accounting for federal, state, and FICA taxes. Conversely, mileage reimbursements, though requiring meticulous tracking, are non-taxable and can offer a more tax-efficient method of covering vehicle expenses.

Financial Planning Insights:

Mike Eklund advises that even minor adjustments in how compensation and reimbursements are structured can significantly impact net income. Collaborating with a financial planner can help identify strategies to optimize earnings and reduce tax burdens. For instance, contributing to employer-sponsored retirement plans or Health Savings Accounts (HSAs) can lower taxable income while promoting long-term financial health.

If you need more help, I advise you to do your research. Some links below will provide more content about your finances and the impact of different investments.

financialsymmetry.com

https://www.financialsymmetry.com/blog/

https://www.financialsymmetry.com/retirement-podcast/

In summary, understanding the tax implications of various components of sales compensation is vital. By staying informed and seeking professional guidance, sales professionals can make informed decisions that enhance their financial well-being.