How to Understand Tax Brackets & Commission
Rather than a salary or hourly wage, many jobs compensate employees by commission. It may be paid as a fixed amount per sale or as a percentage of the total sales made. Either way, often taxes are not paid at the time the employee receives the money, but must be calculated and paid monthly or annually. There are six tax brackets and four filing statuses, all of which have income ranges to determine which bracket a person is in. There are also base taxes for each tax bracket and filing status. Please see the last page of the 2010 IRS Tax Tables.
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Instructions
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When attempting to estimate and pre-pay taxes before April 15, people need to know what federal tax bracket they will fall in or be able to make an educated estimate. Tax brackets are listed as a component of both income and filing status. For example, a person filing as single who made less than $82,400 in 2010 would fall in the 25 percent tax bracket. For married filing jointly, the amount for this same tax bracket is $137,300. Tax brackets change annually but can be found on numerous websites.
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People earning commission may also earn a salaries, hourly wages or other forms of income. If this is the case, it would need to be added to the commission to determine what tax bracket they are in. For example, if Joe expects to earn $47,000 in commission and $12,000 in base salary at his sales job, his total income would be $59,000 in 2010. For married couples filing jointly, the income of both spouses must be added together to figure out total income.
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Estimating annual income will enable a person to estimate what they will owe in taxes if they use the tax tables supplied by the IRS. Each percentage tax bracket is a dollar range. For instance, the 28 percent tax bracket for a single person is applicable to a person that makes greater than $82,400 but less than $171,850. A person in this tax bracket would then owe 28 percent on all earnings over $82,400 plus the base tax of $16,781.25. So, a person earning $97,000 would owe $20,869.25.
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Instead of doing all of the calculations by hand when trying to determine federal taxes, people can use the tax tables supplied by the IRS for the relevant year. The total income is listed in the left hand column. The amount owed can be determined simply by locating the other numerical value directly under their filing status.
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Tips & Warnings
Do not forget when calculating taxes owed that the tax bracket percentage only applies to the amount over the lowest dollar amount for that bracket.
If you have questions regarding how much to pay in taxes on commission earned, please see an accountant.
References
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