ZeroGrit

VP of Hoping My Emails Find You Well

Valued Contributor

Income Taxes on OTE - Federal

Hello Savages...

Headed into my first year earning OTE (my ratio is 70/30 base/OTE) ever in my life and need help figuring out how to file and what counts as a write off. I do live in CA but I'm not worried as much as the state income tax as I am th Federal one.

I do have a tax person I've worked with in the past when I was working as an I9 and gave me homework to do (highlight everything from my bank statements that could be written off and send to him).

In anticipation of said homework, I'd like to know - what can be written off? I see a big chunk of commission is taxed, what should I expect at the end of the year?

Also - why is OTE paid and taxed as commission and not as a "tip/gratuity" where it would be taxed significantly less 🥲. This is a serious question because it doesn't make sense to me - sales leaders if you care to chime in, I'd love to understand.

Thanks Savages!

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💴 Money Management

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Sunbunny31

Politicker

4

Sr Sales Executive 🐰

In CA, you should always worry about the state income tax. They NEVER withhold enough, and their forms always lead to a request for more cash, or an inexplicable (but always small) check refund a few months later.

That said, I'm confused. Are you 100% commission? If so, I have no pearls of wisdom for you; I'm 50/50 and just max out my withholding until it looks like I'll have given the Feds everything except my left kidney. Then I might get a small refund, or at least not owe the amount equivalent to the cost of a new car.

ZeroGrit

Valued Contributor

0

VP of Hoping My Emails Find You Well

I’ll update the post with my earning ratio which is 70/30. But yeah how much would you suggest to change my withholding to for state?

Sunbunny31

Politicker

2

Sr Sales Executive 🐰

I match my Fed. Quick math is it's 46-48% of the 30%, provided you a) actually earn the 30% and b) don't earn more (in which case it's 46-48% of the commission). But of course, the trick is figuring out how much of any of your income is taxable vs not taxable, and that is beyond my skill set; you may have benefits you're paying or a 401(k) you're contributing to, for example. My CPA has given me a general formula for overall withholding, but I have to sort out how much extra to withhold based on projections and changes to my W-4 over the course of the year if I see something coming. Hopefully someone has better advice to offer than I do.

Sunbunny31

Politicker

0

Sr Sales Executive 🐰

See above tax calculator braintank put up. I am NOT a CPA and my taxes are familiar to me because I basically do the same thing year after year and can extrapolate from previous years. I wouldn't take tax advice from me. :)

ZeroGrit

Valued Contributor

1

VP of Hoping My Emails Find You Well

I appreciate this @Sunbunny31 - I’ll talk to my guy about something that works for me, but this is helpful to have an informed conversation!

Sunbunny31

Politicker

0

Sr Sales Executive 🐰

Yeah, I prefer to get a refund than be in the hole.

braintank

Politicker

4

Enterprise Account Executive

If you want to effect amount withheld you need to modify your W-4.

There are a few calculators out there that can estimate how much you'll owe/be refunded if you input basic info from your paycheck ( https://turbotax.intuit.com/tax-tools/calculators/taxcaster/)

As for "write offs" a lot of these rules changed with tax reforms. I'd suggest working with your CPA to figure out what you can deduct as a business expense.

poweredbycaffeine

WR Lieutenant

3

☕️

The first year I earned over 100k, my VP of Finance actually sat all of the high-earners down and silently went through a PowerPoint deck that outlined how to position our tax withholding for maximum deposits and minimal owed to the IRS at end of the year.

I bet your account team would give you some hypothetical advice.

ZeroGrit

Valued Contributor

0

VP of Hoping My Emails Find You Well

Thanks PBC! We don’t have those people in place yet but good to know when we get them that they can be a resource. This may sound weird but I want to implement (eventually) some type of financial literacy component to onboarding - not to give tax advice but let people know what to expect. It was a big shock when I saw my first commission check was nearly half of what I actually earned.
Do you know why commission gets taxed higher? I’ve genuinely tried looking online for answers and don’t get much

poweredbycaffeine

WR Lieutenant

1

☕️

Let's think of it this way:

The IRS sees a massive bump in your paycheck and imagines it is a massive bump to your overall earnings aka tax bracket. They then tax that check at the rate that they'd lump you into if you were to earn that regularly. It goes down the next pay cycle because you only get your standard check, and then it goes up again when you get commission...on and on and on.

They have no way of knowing if the commission is your regular pay or OTE.

ZeroGrit

Valued Contributor

1

VP of Hoping My Emails Find You Well

braintank

Politicker

3

Enterprise Account Executive

I'd test with one of the calculators (or your CPA). Based on what you see you can adjust withholdings accordingly.

Fwiw I live in a state with a higher taxes (Minnesota) and prefer to over withhold and get a refund vs owe in April.

UrAssIsSaaS

Arsonist

1

SaaS Eater

Can you work with a tax expert here? Many smart people in the WR but if you want tax advice, go to a tax expert

ZeroGrit

Valued Contributor

1

VP of Hoping My Emails Find You Well

I do and I will - just wanted to get a sense of what others have done in past. I know the laws change constantly. This was less about actual tax advice and more just getting a general feel of how people navigate it. Also still would like to know why OTE is taxed so high 🤷🏻‍♀️

UrAssIsSaaS

Arsonist

0

SaaS Eater

My understanding is that commission is always taxed at the highest tax bracket because it is potentially unlimited in how much you can earn, therefore would be taxed at the highest rate, then when you file your tax return at the end of the year its adjusted for what you actually made, hence why sales people often get decent sized refunds when filing their taxes.

paddy

WR Officer

1

Director of Business Development

"Taxes are like crayons...there's no iPhones on Thursday when you have to eat pancakes" - Joe Biden

Hoopnip

Politicker

0

Commercial AE

Grab your ankles.

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