Firm owes taxes on commissions



Q: I work for a small, family-owned business and receive a base salary, plus commission. The salary is taxed, and I receive a W-2 at the end of the year. But my employer doesn't deduct taxes from my commissions, and I receive a 1099 at the end of the year. To make matters more confusing, some sales consultants who do the same job as I do are treated as independent contractors and have no taxes taken out of their salary or commissions. They receive just a 1099 income statement at the end of the year. Are these differences legal?

A: I'm assuming you're wondering why you all can't be treated like independent contractors, which means your employer wouldn't deduct taxes from anybody's pay. You, in particular, can't be treated as an independent contractor because you're on staff. That means your employer must deduct federal income taxes as well as Social Security and Medicare taxes, the Internal Revenue Service says. And the company must pay unemployment insurance taxes on wages paid to you.

Furthermore, the total used to calculate those taxes should include your commissions because the IRS considers them wages. Instead, your company is treating you like a two-headed employee who is both a staff member and an independent contractor. You have to be one or the other. Since you are an employee, your company could be liable for the unpaid taxes on your commissions. In the meantime, you should pay the taxes on your commissions, as independent contractors are required to do.

Some companies find the independent-contractor category tempting because of the tax savings. But employers can't classify workers as independent contractors willy-nilly. The companies have to meet IRS criteria that involve giving the contractor control over when and where to work and what equipment to use.

Some workers find the 1099 attractive because the company doesn't deduct taxes. But the workers are expected to pay the IRS its share. If your co-workers are truly independent contractors, they are 1099 all the way.

Carrie Mason-Draffen is a columnist for Newsday, a Tribune Publishing newspaper. E-mail her at

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