Commissions and Draws - Help?

SamanthaQ

This is probably a pretty novice question but I need some guidance please! We have an employee who earns commission and takes a draw. At this point in the year (December - almost end of year!) he has not earned enough commission to cover his draws. It took him a little longer to get off the ground than we expected and hence the reason he is in the red!

We do have an agreement with which we have the right to limit draws once they get too far into the red, however, we have opted not to adjust his draw because we felt he would be able to catch it up with his sales commissions.

What are the implications of having a negative draw amount at the end of the year (from a payroll perspective)? Can we carry the negative amount over into the next year and offset it with commissions next year?

Help!

NaeNae55

Yes. The Draw is an agreement between you two. Unless your agreement doesn't allow it, you can carry it forward.

Tax wise there is no change. Taxes are based upon wages received, not necessarily on those earned.

Good luck!

Nae

marc

All of this depends on the way you handled the draws. Did you just advance him a lump sum or did you run it through payroll?

SamanthaQ

We run the draw through payroll. My payroll assistant is saying that it creates some sort of negative accumulator that cant' be carried into next year. I'm not sure I understand it all and am looking for guidance...

marc

At this point, the EE has been taxed on all the dollars that have been run through payroll. That means he/she has "earned" all the money, as far as the IRS is concerned. You can have him/her sign a note acknowledging the overpayment and begin a payroll deduction process to collect those dollars.

This is theoretically inconsistent because by running it thru payroll you are saying those dollars are earned and not an advance, but that can be overcome by having the EE sign a note and the agreement to pay back the overage (and any future overages), via payroll deduction.

E Wart

I think we are talking about 2 things here.
First- If he was "provided this money in 2006, (actually paid it), it would be taxable income. Anything on his "check" would be considered taxable income whether it is salary, commission, advance, bonus, etc.

Secondly-Whether he as "earned it or not". If this is draw against commission and what he is drawing isn't covering his commission earned, he is "in the hole' as far a money is concerned until his commmission/sales increases. Whether you continue providing him this draw (until his commissions improve) is up to you/the company and the employee. The initial agreement should explain draw against commmission and what should happened if not met. I don't know why you would need a second agreement. However, if he isn't meeting his draw, I would highly suggest decreasing it or stopping it until he does (unless he has something that has been sold but not paid yet that will wipe out this money owed.)
This is always hard for new employees on commission. If he is an experienced sales person, it probably doesn't bother him and he will probably want to continue being in the hole. If he is new, you may want to stop/reduce.
(Also, what will happen if he doesn't make the commission and he has to be released with oweing money. Does the initial agreement say you will eat this or that he will owe it.)
Also, is this person on any type of salary or does all he get is draw against commission?

E Wart