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How is Commission Taxed? 3 Ways Your Company Taxes Commission

Posted 14 April 2016 under Tax


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Our helpdesk receives hundreds of questions related to tax where commission is involved. A misconception that comes up time and time again is that people believe commission is taxed at a higher rate than what a fixed salary is.

This isn’t true!

Tax on commission is at exactly the same rate as a fixed salary.

The confusion comes from the fact that tax is calculated on a different amount each month (depending on your performance, of course), and this can result in different tax rates being applied month to month. To make matters a little more complicated, there are different methods your company can apply to work out your monthly tax amount on your commission.

To try clear matters up, let’s have a look at 3 formulas that companies typically use to calculate tax on variable income such as commission payments.

3 Formulas for Calculating Tax on Commission

1. Aggregated Annual Taxable Income

With this method, your tax is calculated by multiplying out your monthly earnings (i.e. your gross salary including commission) to an annual amount and applying the relevant tax rate.

Let's have a look at a sample case to show the calculations.

Christine is a 38-year-old sales representative for a printing company. She earns R8,000 as a basic salary, plus R1,000 a month towards a retirement fund. Her commission for the month of March 2016 was R18,000.

First off, we’ll need to calculate her gross salary, i.e. the total value of cash and benefits paid, and multiply this by 12 to arrive at an aggregated annual amount.

Annual gross salary = (Salary + commission + fringe benefits) x 12
(R8,000 + R18,000 + R1,000) x 12
= R27,000 x 12
= R324,000

Next, we need to subtract any tax deductions to determine the annual taxable income

Christine receives R1,000 a month as a contribution to a retirement fund. The allowable deduction for retirement funding income is limited to 27.5% of gross salary, to a maximum of R350,000 and can’t exceed actual contributions.

Christine’s contributions only amount to R12,000 a year, which is well below 27,5% of her annual gross salary so she’s able to deduct her full contribution.

Therefore, her annual taxable income is:
R324,000 – R12,000
=R312,000

If we refer to the 2016/207 tax rate tables, we see that on this amount Christine needs to pay tax at a rate of R61,296 + 31% of taxable income above R293,600.

Time for another calculation!

Annual tax = R61,296 + [31% x (R312,000 – R293,600)]
= R61,296 + [31% x R18,400]
= R61,296 + R5,704
= R67,000

Now, we can apply any rebates, to get to a final tax amount.

Christine is younger than 65 and therefore eligible for the primary rebate of R13,500. This means her annual tax is reduced to R53,500 (R67,000 – R13,500).

Lastly, (or should that be eventually!) we can divide this amount by 12 to get to the monthly tax rate.

Monthly tax = annual tax / 12
= R53,500 / 12
= R4,458.33

Voila! Christine will pay R4,458.33 tax for her March 2016 salary.

If you’re not interested in crunching all these numbers yourself, we provide a handy income tax calculator that works this all out in less than 5 seconds.

As with most commission earners, Christine’s commission component can vary month to month. In her less successful months, her aggregated amount could fall into a lower tax rate bracket, and vice versa.

This approach to tax on variable income means that these earners can often land up paying too much tax over the year period, as the calculation is based on the assumption that they earn the same amount for 12 months of the year, which is not the case for commission earners. It’s advised that these earners should always file an income tax return in order to receive any surplus tax as a refund from SARS.

2. Tax Directive 

A tax directive is an instruction from SARS to your employer for your tax to be deducted at a set, fixed rate each month. In order for this to be done, you need to apply for a tax directive and you’ll have to supply supporting evidence of estimated earnings and expenses. SARS won’t consider a tax directive if you don’t submit a detailed income and expense statement with your application.

Considering a tax directive is based on an income estimation, it’s not your full or final tax liability. Your annual tax assessment, evaluated on actual earnings, will determine the total tax due, which may or may not result in a further amount payable to SARS.

A tax directive makes sense in cases where commission due (and subsequently your total income) varies by only a small margin each month, and you have a fairly predictable track-record on which to base an estimate.

In instances where commission is less stable, it’s probably not such a good idea to consider taxation at a fixed rate, as this is likely to result in a significant difference between estimated and actual earnings, and therefore on final tax liability too.  

A tax directive is valid only for a maximum of a 12-month period, and as such you’ll have to reapply each year, or in the event of changing employers.

3. Annualised Amount of Tax Payable 

The last technique is used less regularly, but we’ve included it here as it is still a valid manner in which tax can be calculated and paid on variable income. It’s slightly more complicated, but it’s said to give you a more accurate tax amount, leaving less room for over or under-taxing. This approach uses an average income amount to determine the tax to pay that month based on the number of pay periods and the total tax already paid.

Let’s use another example to demonstrate the calculation.

Mandisa is 24 years old and is a nail technician at an upmarket spa and salon. She receives a fixed salary of R5,000 plus commission on all treatments and product sales, which can vary from month to month quite drastically depending on her shifts and bookings. For the sake of this example, (and to keep to a single tax year’s rate tables) we’re going to imagine that it’s June 2016 and that her income since March 2016 has been the following:

Month
Salary
Commission
Taxable Income
Tax Paid
March 2016
R5,000
R9,200
R14,200
 R1,431.00
April 2016
R5,000
R13,600
R18,600
R2,340.34
May 2016
R5,000
R7,200
R12,200
R953.66
June 2016
R5,000
R16,300
R21,300
 


First, we need to determine the average monthly income by adding up all taxable income and divide it by the number of pay periods for the year so far. Remember this is based on the tax year, which runs from 1 March until end of February, not the calendar year. In our example this is the 4th pay period. 

(R14,200 + R18,600 + R12,200 + R21,300) / 4
= R66,300 / 4
= R16,575

Next, we need to work out the tax on this average monthly income by referring to the SARS 2016/2017 Tax Tables. I’ve used our Income Tax Calculator to save time (and trouble) here.  

The calculator result is R1,931.17 tax for the month.

Now, we multiply the tax amount by number of pay periods, and then subtract the tax that’s already been paid for the same period.

(R1,931.17 x 4) – (R1,431.00 + R2,340.34 + R953.66)
= R7,724.68 – R4,725.00
= R2,999.68

So a total of R2,999.68 will be deducted for tax in June 2016. 

Incidentally, had Mandisa’s tax been calculated the way most companies do it, i.e. as per our first example, then her total tax paid to date would have been R8,119.34, or R394.66 more than required. This method offers Mandisa a closer payment to her eventual tax liability.

Another Tax Benefit for Commission Earners

It should also be remembered that those who earn more than 50% of their income from commission can claim a number of income-generating related costs as tax deductions including, but not limited to:

  • car and travel expenses (a detailed logbook needs to be kept for this)
  • wear and tear, or depreciation, on personal items used for work, such as cellphones or laptops
  • home office expenses

Any claims will need to be apportioned for business usage and must be proven to have been used for the express use of generating income.



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