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A client I'll call Pete sells heavy equipment, and last year was the best of his career: $350,000 and change. When tax time came, he found out he owed another $20,000 that he never saw coming.
It rattled him enough that he missed the regular filing deadline. He filed an extension and planned to pay last year's bill out of next year's commission.
The first thing I told him was that he hadn't done anything wrong. Nobody had ever explained how his commission check gets withheld.
Most reps worry about the opposite problem. You open the pay stub, see what came out, and feel like the government took a massive bite. For a lot of high earners in sales, though, the commission check is taxed too little. Most companies withhold a flat 22% federal on commission, and if your top bracket sits above that, the difference stacks up quietly, check after check, until April asks for all of it at once.
I put the whole explanation into a video, and it's live on my YouTube channel today. I compare commission withholding to throwing darts with a blindfold on, which makes more sense once you watch it.
What's in it
Why good reps who did nothing wrong get hit with a bill in April, and the four things I have my clients do before then:
- Find your gap: have a CPA project what you'll owe and compare it to what's being withheld.
- Close part of it at the source with your W-4.
- Move a slice of every commission check into a tax account you'll forget about until April, because tax money sitting next to spending money starts to look like spending money.
- Pay the IRS in quarterly installments instead of one lump sum.
It also covers how the plan breaks, including the Q4 accelerator nobody saw coming, the job change that resets your withholding, and the tax money that gets "borrowed" for a big expense and never quite makes it back.
I'm a financial planner and not a CPA, so use it to understand your situation and bring what you learn to whoever does your taxes.
Watch the video here, and if you get paid on commission, subscribe to the channel. I built it for you.
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