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Re: Commission Only Salesperson - Withholding Tax Calculation

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Hi,

As a commission only salesperson (i.e. only get paid if I sell something), how should withholding tax be calculated each pay period?

If I'm paid fortnightly, and I have settlements totalling e.g. $4000 one fortnight and $2500 the next, should the withholding tax table be used to determine the tax payable?  or a method that apportions the commission across multiple pay periods?

I think the gross amounts are "for that pay period" and so should use the tax table - but my employer is using an average earnings and apportioning method and it means I've received thousands less in the hand than if the tax table was used directly.

I can't find a defiinitive statement on the ATO website to back my thoughts up.

Help please.

 

 

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ATO Certified

TaxTime Support

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Hi @curioustaxpayer,

 

Thanks for your question!

 

Generally speaking, tax will be calculated on commissions using Schedule 5. You'll note that under the heading "normal earnings" there is a paragraph about using an average of gross taxable earnings if an employee's pay fluctuates significantly. This is probably what your employer is using to calculate the withholding.

 

If you look at the information under the calculations for "Method A", you will see that a commission can be divided by the number of pay periods that it relates to. If they are not using Method A, then this may be why your commissions are being calculated in a different way than you expected.

 

There is nothing wrong with them calculating withholding using Method B, but if you feel that they should be using Method A, or the fortnightly tax tables instead, you can certainly have a discussion with them about this.

 

The problem is going to be that if your income fluctuates a lot, using the fortnightly tax tables may result in an incorrect amount of tax being withheld. This may see you end up with a tax debt when you lodge your tax return, and even if your employer has not withheld the correct amounts it will be your responsibility to have this debt paid.

 

I would suggest working out some example scenarios and seeing how the tax withheld would be applied to your pay using each of the different methods described here, If your taxable income is generally the same each year, you should be able to get a good idea of how it would work out if these withholding treatments were used for the entire financial year.

 

I hope this has been helpful, but please let me know if there's anything else I can assist you with.

 

Thanks,

 

Rachael B.

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Best answer

ATO Certified

TaxTime Support

Replies 3

Hi @curioustaxpayer,

 

Thanks for your question!

 

Generally speaking, tax will be calculated on commissions using Schedule 5. You'll note that under the heading "normal earnings" there is a paragraph about using an average of gross taxable earnings if an employee's pay fluctuates significantly. This is probably what your employer is using to calculate the withholding.

 

If you look at the information under the calculations for "Method A", you will see that a commission can be divided by the number of pay periods that it relates to. If they are not using Method A, then this may be why your commissions are being calculated in a different way than you expected.

 

There is nothing wrong with them calculating withholding using Method B, but if you feel that they should be using Method A, or the fortnightly tax tables instead, you can certainly have a discussion with them about this.

 

The problem is going to be that if your income fluctuates a lot, using the fortnightly tax tables may result in an incorrect amount of tax being withheld. This may see you end up with a tax debt when you lodge your tax return, and even if your employer has not withheld the correct amounts it will be your responsibility to have this debt paid.

 

I would suggest working out some example scenarios and seeing how the tax withheld would be applied to your pay using each of the different methods described here, If your taxable income is generally the same each year, you should be able to get a good idea of how it would work out if these withholding treatments were used for the entire financial year.

 

I hope this has been helpful, but please let me know if there's anything else I can assist you with.

 

Thanks,

 

Rachael B.

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Newbie

Replies 2

Thanks Rachael.

 

I've tried all the methods and can't get it to match the tax withheld.

If they're using average total earnings as "normal salary" .. how does it work for the first pay of the financial year? do we use the taxable amount of the commission payable for the first pay period as the "fortnightly salary amount"?  If we work an example .. taxable for the first fortnight of the financial year is $6670.  The tax withheld by employer was $2800.

 

Tax tables say to withhold $2121.  Then use the taxable for the fornight again to /26 and then add that to the salary amount and get the tax on 6670 + 6670/26 = 6926.  Tax on that is  $2221.  Difference is $100.  Withholding becomes $100 * 26 = $2600.  Still not $2800.

 

The next fortnight, total taxable commission is $4330.  Tax withheld on this occasion was $2110.  For this one, is the average total earnings 6670+4330 = 11000 / 2 = 5500.  Tax tables on that is 1664.  Taxable commission for the fortnight 4330/26, add that to 5500 = 5666.  Withholding tax on that is 1730.  DIfference is 65, withholding becomes 65 * 26 = 1690.  Which is not $2110.

 

Obviously we are doing something wrong.  Any help you can provide would be greatly appreciated.  Thank you!

ATO Certified

TaxTime Support

Replies 1

Hi @curioustaxpayer,

 

Thanks for getting in touch again!

 

For the first pay of the financial year, if your employer is using an average of gross taxable earnings, they are able to use an average from the previous financial year if there is no data available for the current year.

If you were newly employed, then your employer could also use expected future earnings in their calculations instead of prior earnings.

 

Having said that, though, if the gross and withheld amounts that you've used as an example here are true to what your employer has reported on your payslips, I am unable to determine how they are calculating the tax withheld. Even if they were just calculating withheld amounts on a flat 47% rate of tax, the amounts you've indicated you've received do not appear to align with that.

 

I don't think you've calculated anything incorrectly but I think it might be worth talking to your employer about the amounts they're withholding. I'd suggest that you ask them how they've calculated the tax withheld and why they've used that particular method. You may wish to refer them to the tax tables we've discussed here and see if they'd be willing to change how they calculate the tax on your commission payments.

 

Ultimately it's up to your employer to decide if they want to use the resources and tax tables that we provide. They aren't required to use any particular calculation method as long as they are withholding enough tax to cover your end of year liabilities.

 

I hope this is helpful, but please let me know if you have any other questions.

 

Thanks,

 

Rachael B.

Newbie

Replies 0

Thanks Rachael,

I really appreciate you replying.  I'll go back to payroll to ask them to show exactly what they're doing .. even if they want to continue to overtax that's ok (it'll all come out in the wash) - but I want to be able to budget for it.

 

Thanks again

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