I'm confused about FICA and SS taxes on Commisions

[whitestick]

My DSIL asked me about the negatives of a life on commissions, and having never done that, I could only answer the most obvious. He says that the company will pay him commissions, but won't pay any of the taxes, and that he will be responsbile for that.
I'm not even sure that is possible, but assuming that it is, in addition to the obvious having to estimate and pay quarterly income taxes, how will FICA and SS work. Does anything have to be paid directly by him to those respective agencies, or if not, does that mean that he will receive no SS credit for those years (I assume the answer is he will not), and on FICA does that mean he would not be eligible for unemployment (I also assume not), but I just don't know. This will be in Texas if that matters.

 

[youbet]

Sounds like he'll be in business as a manufacturer's rep. He'll need to pay both halfs of FICA and file estimated taxes. If he's not into that sort of thing, he should probably find a tax pro to help him get set up and show him what records he'll need to keep throughout the year.

 

[F-One]

To answer your questions:

No, he does not pay to FICA/SS directly. He will pay estimated quarterly taxes, the estimated tax form that is used to determine estimated taxes includes calculations for FICA/SS (self-employment) taxes.

Yes, he will get SS credit for his income. SS puts out a yearly statement with amount listed.

I cannot answer the question about unemployment.

 

[OAG]

IRS Schedule C; IRS Form SE and some others if he will be depreciating any equipment (like a vehicle). He will pay ALL employment taxes, like FICA, Medicare BOTH sides (since he is both the employee and the employer) and, of course his Federal Income Taxes and any applicable State Income Taxes (If he has NO other vehicle for these he will have to do estimated taxes - IRS Form 1040ES). Lots of paper work and lots of taxes to pay on a TIMELY basis -- get some professional help or go to the IRS site and READ; also the local library should be of some help (look for a book on Self-Employment Accounting/Bookkeeping).

 

[ziggy29]

To answer your questions:

No, he does not pay to FICA/SS directly. He will pay estimated quarterly taxes, the estimated tax form that is used to determine estimated taxes includes calculations for FICA/SS (self-employment) taxes.

This is mostly true. But if he also has a regular W-2 job with standard withholding, if he has enough withheld to pay taxes (income taxes, FICA and Medicare) on the commission income (or other 1099 income with no withholding), no estimated tax filing is necessary.

That's also true if he has a spouse who is subject to regular W-2 withholding and they file jointly.

My wife is a part-time, home based travel agent and she receives 1099 income from the host agency on the commissions she generates (she's an independent contractor for tax purposes and she easily passes all the tests). I just have enough taken out of my paycheck to cover the taxes and FICA she owes on her earnings. That way, no hassles with estimated taxes are required, though we do need to keep track of all income and expenses and file Schedule C.

 

[OAG]

This is mostly true. But if he also has a regular W-2 job with standard withholding, if he has enough withheld to pay taxes (income taxes, FICA and Medicare) on the commission income (or other 1099 income with no withholding), no estimated tax filing is necessary.

That's also true if he has a spouse who is subject to regular W-2 withholding and they file jointly.

My wife is a part-time, home based travel agent and she receives 1099 income from the host agency on the commissions she generates (she's an independent contractor for tax purposes and she easily passes all the tests). I just have enough taken out of my paycheck to cover the taxes and FICA she owes on her earnings. That way, no hassles with estimated taxes are required, though we do need to keep track of all income and expenses and file Schedule C.

I did not say he had to pay SE directly - just pay them. I understand that they are calculated on from 1040ES (Line 11, I think). But he will have to pay them one way or the other. Also I think I did mention that unless he had another "vehicle" pay them he had to do estimated taxes. Another W2 job would qualify as another "vehicle". He could also use the spouses job, if she had one, to pay them, provided she agreed. Some spouses may not [-]and/or file separately.[/-] Additionally, depending on the level of income, at about 15.3% SE taxes on OP income and an amount for estimated income taxes -- she may not appreciate that.

Just to keep the response simple IMHO, and not go into all of the potential variables, is to use the 1040ES (along with a Schedule C) as it gives the best visible and potentially the most accurate depiction of what OP asked about which, as you mentioned, he would, at some point have to do anyway.

 

[aenlighten]

Employment tax is separate

so unless he actually set up a business and paid state and federal employment tax on his payroll he would not be eligible for unemployment, at least on his commission earnings.

 

[whitestick]

WOW! No wonder I didn't know any answer to my questions. Sounds complicated enough, that he may have to go the professional tax advisor route, to help him set up, as this seems well beyond my ability to read the tax book, and plug in the forms.
Thanks for all your help.............................