Executive Summary

Sales is at the heart of any business whether it is a large or small organization. Sales representatives are the engine that makes a company grow. Without them, it’s almost impossible for a business to survive. And for those efforts, sales representatives are typically nicely compensated.

When it comes to paying taxes on that compensation, it can get a little tricky. Many organizations tax base pay and bonus or commission pay differently. This case study walks through how TaxAssurances prepared a 2022 tax return for a corporate sales executive that works for a well know financial services firm.

Background

• The sales executive is single with no children or other dependents.
• They live in Westchester County which is a suburb of NYC
• They do not live in Yonkers NY.
• They worked in sales for a globally recognized financial services firm.
• Their W2 income from one employer of just over $250k.
• They contributed to the company 401k plan but not the maximum amount allowed.
• They had health insurance through their employer.
• They had no investment accounts with dividends or capital gains or losses and had no crypto.
• They had interest income from a savings account and a home property tax escrow account
• They own the home and gave items to charity.

Results

• They owed federal taxes of just over $8.3k because their marginal federal tax rate was 35% and their effective federal tax rate was 24.2%. That said, their regular pay was taxed at 16% and their commission pay was taxed at 21%.
• They received a NYS refund of just over $5k and had it directly deposited into their checking account.
• They had a federal estimated tax penalty for under paying taxes during the year.
• They had an additional Medicare Tax of just over $500. We attached Form 8959.
• They had a net investment income tax of a few dollars. We attached Form 8960.
• We realized that it was more beneficial to take itemized deduction than the standard deduction because of mortgage interest, property taxes and charitable donations that they made during the year.

Challenges & Solutions

Having a federal tax liability at the end of the year can be surprising and confusing. Checking on the withholding of an employer can help ease or even eliminate that surprise or confusion factor.

Solution #1

To pay off the federal debt they could pay off full amount with a check or other payment to the IRS.

Solution #2

To pay off the federal debit, they could pay it off in installments under a payment plan with the IRS.

Solution #3

To avoid future federal tax debt obligations come tax preparation time, they can adjust their W4 with their employer. Toward that effort, we went over that process and the appropriate amount of future federal withholdings with their employer.

Solution #4

Due to the fact that they do have disposable income, we had a conversation around them seeking other tax advantaged options with their employer and other advisors.

Conclusion

Navigating the complexities of a substantial federal tax liability requires strategic planning and informed decision-making. In the case of our single sales executive residing in Westchester County, their robust income, particularly from commissions, led to an unexpected federal tax owed. However, through a meticulous examination of their financial landscape, we uncovered valuable opportunities and implemented effective solutions.

The comprehensive approach involved addressing their immediate tax obligation, leading us to propose the option of settling the federal debt either through a lump-sum payment or a structured installment plan. Additionally, recognizing the need for preventive measures, we delved into adjusting their W4 withholding with their employer to align with their actual tax liability more accurately.

Furthermore, given their disposable income, we explored avenues for optimizing their tax situation by suggesting tax-advantaged options. This not only aimed to mitigate their current liability but also laid the groundwork for a more tax-efficient future.

In essence, the case underscores the importance of proactive tax planning, particularly for individuals with dynamic income structures. By combining immediate remedies with long-term strategies, we not only addressed the existing challenges but also positioned our client for a more tax-resilient financial journey ahead.