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odd tax question about paying back draw to employer
Old 04-22-2019, 01:42 PM   #1
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odd tax question about paying back draw to employer

Please no lectures or opinions on whether I should pay back the draw or criticism of how my pay system is done. It would take to long to get into the how's and why's of the entire situation.

I only want to know will this affect my taxes.
I do have a CPA who I can ask next time I go in there - I don't like to email him with too many questions as he gets very busy.
So was curious - before asking my CPA - if anyone knew the answer to this.

Background info:
I have been employed as a commission based sales rep for 10 years by my company.

I recently scaled back the amount of work I do (I have an extra side job now), so I earn less commission than I did.
I probably earn $5000 a month commission instead of $9000 a month I was earning on average (not counting the side job).

Basically, we have two choices of how we are paid:

1. We can choose to be paid commission the 15th of every month, based on what we sold the previous month

2. We can choose to get a "draw" on the 15th and 30th of each month, then it is "settled" on the 15th of the following month based on how much we sold.
For choice number 2, which is the one I have always had up until now -
If we earn more in commission than our draw we get the "overage" commission.
or -
If we earn less than our draw, we have an "in the hole" figure which usually is caught up in the next month or two.

This system has worked well for me through the 10 years - except now my "in the hole" figure is way up.
I plan to spend more time with my side job, while keeping this main job - going forward I expect I will be earning $3500-4000 a month commission with the main job.
I will still get all the benefits (free health insurance, etc etc) by scaling back my hours at my main job.
My side job does not offer good health insurance (they do but it costs a lot) so it's to my advantage to keep working my main job - for that and other benefits/reasons too long to get into.

So I agreed to send my company a check for $7000 - to cover the amount I'm in the hole - and go to commission only (option 1) from now on out.

Basically I got a "free loan" from the company because the past several months I did not earn enough to cover my "draw" I was getting twice monthly. It slowly went up the past 6-8 months - to that $7000 amount.

The situation is also due in part to a new reimbursement system they have in place for our expenses - but to keep this simple I won't get into all that here.

The bottom line is I am sending them a check for $7000 because they overpaid me the past 5-6 months - because I did not sell my typical amount I have the past 9-10 yrs.

Since I've always had a variable income (some months make $15,000, other months make $3000), my company did not worry about my being "in the hole" until recently when they figured out the pattern of income over all these months - where I'm not doing as much as before in sales.

I'm a W2 employee, and was wondering do I need to worry about the $7000 I'm paying them back affecting anything as far as taxes?
Because, it looks like to the IRS I earned $7000 more than I did.
On my pay statements (the ones breaking down all orders/commission sales - not given to the IRS) for work it says I'm 7000 "in the hole".
This is accurate.

Once my employer credits me with the $7000, I will no longer be "in the hole" but the fact I paid them $7000 for the "free loan" (where they kept overpaying my draw) will not be reported to the IRS.

So the IRS will have that I made 7000 more - but no record me paying back the "free loan".

I'm probably overthinking this. But wondered if it's going to mean I pay taxes on the $7000 I "earned" which I really shouldn't have based on commission.

From now on, I told them just to put me on straight commission, which they are doing - so this will not be an issue going forward. I did not get into the reasons as if they knew I had a side job they'd quit sending me sales lead orders (which are basically a way for me to earn easy money). Best that I just go to straight commission and not tell them I'm purposely scaling back with how much work I do. Even though I'm an employee, I telecommute and rarely go into the office - so they do not monitor my activities (how many hours I put in).
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Old 04-22-2019, 02:00 PM   #2
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I will defer to the folks with accounting background, but it seems to me that the advances showed up as a "+" on the W-2 income, and the return would show up as a "-". At the end of the year, the W2 amount should be whatever you earned in 2019 minus the $7000.
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Old 04-22-2019, 02:02 PM   #3
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Why don't you simply ask HR or accounting how they figure this out? Be sure and follow up at the end of the year and be sure your number is correct.
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Old 04-22-2019, 02:16 PM   #4
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It would seem to be an easy phone call discussion with whoever handles payroll. You basically want a correct W2 by years end.
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Old 04-22-2019, 03:20 PM   #5
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The company should treat your $7,000 check as negative wages and only report the net amount on your 2019 W-2.
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Old 04-22-2019, 04:49 PM   #6
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I would ask them to work it out over the next 5-7 months as a payback. This would force them to keep you on their books while the loan is repaid. If you cut them a check there is no incentive to keep you around. Since you aren't selling as much, costing them benefits, and blocking the territory from another sales agent, as soon as you break even expect to be fired.
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Old 04-22-2019, 05:02 PM   #7
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have you thought about retiring early?

but seriously talk to HR/Acctg so that you don't have to pay tax on unpaid remuneration
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Old 04-22-2019, 05:14 PM   #8
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Quote:
Originally Posted by Gill View Post
The company should treat your $7,000 check as negative wages and only report the net amount on your 2019 W-2.
Gill
I would think this is the way it should work, as well.

But, I would be concerned about the main employer feeling you are no longer carrying the load they expect for that area. At least that is how I would look at it. A consistent 44% decrease in sales/commission would concern me, unless my entire sales base was in a decline.

More than you wanted, I know.
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Old 04-22-2019, 05:40 PM   #9
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As others have said, make sure you get a correct W-2 at the end of the year. It might be possible to have them correct your running balances right now if they make an accounting entry and apply the $7,000 you "reimbursed" them correctly to your year to date FICA, Medicare, and Fed withholding balances.

I'd ask them to make a correction right now to reflect your true wages.

I'm guessing of the $7,000 amount about $434 was FICA, about $101.50 was Medicare, and $500 or thereabouts was federal withholding. So really, approximately $6,000 was take home or "your money".

Anyway, what I'm saying is the FICA, Medicare, and Fed withholding portion of the $7,000 needs to be calculated and accounted for.

Curious, who suggested paying back $7,000? You or the company?
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Old 04-22-2019, 06:05 PM   #10
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Quote:
Originally Posted by workburnout View Post
...... Once my employer credits me with the $7000, I will no longer be "in the hole" but the fact I paid them $7000 for the "free loan" (where they kept overpaying my draw) will not be reported to the IRS. ....
I don't think you are right there... but you can double check with your company to find out. For example, let's say that they paid you $50k but you only earned $43k so you pay them $7k... only $43k should show up on your W-2.

Gill nailed it.
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Old 04-22-2019, 09:50 PM   #11
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If they bookkeeper your draws as taxable income, the negative draw would reduce it and you should be fine.

If it is book kept as a loan, it never affected taxable income and you should be fine.
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Old 04-22-2019, 11:45 PM   #12
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I am with Montecfo...


The draw should not be considered income as it is not earned... and paying back the draw should also not be considered negative income...


BTW, did you think about not paying it back and just let your future commissions go toward your negative? IOW, you still are on a draw but your draw is zero (or enough to pay for insurance etc.).. this would mean you will have paid it off in 2 or 3 months and be good to go...
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Old 04-23-2019, 07:34 AM   #13
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.... and paying back the draw should also not be considered negative income...


BTW, did you think about not paying it back and just let your future commissions go toward your negative? IOW, you still are on a draw but your draw is zero (or enough to pay for insurance etc.).. this would mean you will have paid it off in 2 or 3 months and be good to go...
Did you mean should be considered negative income?

I agree on the second part... I would have had them make the draw zero until it was all square, and then shift to receive commissions as earned.
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Old 04-23-2019, 08:57 AM   #14
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Two things:

First, IMO the safest thing to do is to let payroll deduct the $7K from your next check(s), even up to 100%, until you're paid up. That way you know the income numbers they report will be correct, and the net result for you should be exactly the same as you paying them $7K, just timed slightly differently. I didn't see any reason mentioned that you couldn't do that, but if that's not feasible or if there are other complications, then...

If you need to do it as you specified, talk to your payroll dept. and ask if they can treat it as a return of overpaid wages, so that the tax reporting comes out right.
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Old 04-23-2019, 11:12 AM   #15
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Thanks everyone. I was able to get in touch with my company accounting dept (not always easy as they often don't reply to requests). Since I asked, they said they will credit me on my next 2 paychecks so the $7000 will be offset. So I will not pay tax on that. I don't think they'd have done that had I not asked. Unfortunately they aren't great accountants - unlike the prior accountant who retired 2 yrs ago. It's still worth staying with the company due to other reasons - like the free health ins. and freedom to work from home. I only have a few more years where I'm working there full time - as I'm gradually scaling back in order to semi-retire. Thanks for all your helpful comments.
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Old 04-23-2019, 12:02 PM   #16
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As stated I would be sure the W-2 at year end is correct. In my case I left an employer and they never threw the off switch in payroll and they kept paying me. I called HR and told them if they wanted to keep paying me I was good with that. HR person said opps!! They forgot to turn off payroll. Asked if I still had the money in my account for direct deposit. I answered yes we agreed on the amount to be returned via a reverse from account. They agreed to send letter to confirm amount. Ended up going back to work for them later in the year and when the w-2 was issued the system did not make the adjustment for the payback and they issued a corrected w-2 once I brought it to their attn.
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Old 04-23-2019, 05:29 PM   #17
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Did you mean should be considered negative income?

I agree on the second part... I would have had them make the draw zero until it was all square, and then shift to receive commissions as earned.



No, what I wrote... if a draw is not income a payback on a draw is not negative income...
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