Workers who get paid mainly on commissions are normally classified as independent sales representatives for income tax purposes. At the end of the year, instead of getting a W-2 like most workers, they report income to the Internal Revenue Service on a 1099-MISC. Unlike regular employees, independent sales representatives must pay their own Medicare and Social Security taxes and are not subject to income tax withholding.
Independent Contractor vs. Employee
A salesperson is considered an independent contractor if the person paying them "has the right to control or direct only the result of the work and not the means and methods of accomplishing the result," according to the IRS. Independent sales representatives usually set their own schedule and may work for more than one company. They generally pay their own expenses and work mainly on commission. They don't receive a salary or a guaranteed minimum income.
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Direct sellers and licensed real estate agents are automatically considered independent contractors. The IRS considers these salespeople "statutory nonemployees." For example, direct sellers for companies such as Mary Kay and Avon fall in this category because they sell through face-to-face contact instead of using a fixed retail location. Licensed real estate agents are in this category because their income is contingent on the sale of homes or other properties.
As an independent sales representative, you must report your income to the IRS even if you do not receive a 1099-MISC. Report the income on Schedule C or Schedule C-EZ, and deduct any business expenses such as travel, supplies and the use of your home as an office. You also must pay your own Social Security and Medicare taxes, which will equal about 15 percent of your net self-employment income. Use Schedule SE to calculate the amount. If most of your income is from work as an independent contractor, consider paying quarterly estimated taxes to avoid a large tax debt and possible underpayment penalties at the end of the year.
If you received a 1099-MISC and believe you should be treated as a regular employee, first attempt to resolve the issue with the company or person paying you. If that fails, file a Form SS-8 with the IRS asking for a ruling. It generally takes six months to get an answer, and the IRS will contact the other party for information. Companies or individuals regularly hiring independent contractors to perform similar work can file a Form SS-8 asking for a determination of employee status.
Alan Sembera began writing for local newspapers in Texas and Louisiana. His professional career includes stints as a computer tech, information editor and income tax preparer. Sembera now writes full time about business and technology. He holds a Bachelor of Arts in journalism from Texas A&M University.