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Tax treatment of commissions

In an atmosphere of fierce competition, sales incentives act as important factors in enhancing sales performance. And one of the tools often used by companies to improve their sales revenue is the grant of commissions to their sales personnel.

As opposed to salary, which is a fixed compensation for services paid on a regular basis, a commission is a fee or remuneration paid to an agent, representative or employee for services rendered, which is usually determined based on individual sales. Commissions may come in the form of profit shares, performance bonuses, performance incentives, or even sales discounts. Common industries where commission is used prevalently include car sales, property sales, insurance broking and many other sales jobs.

The tax treatment of commissions would depend on whether an employer-employee relationship exists between the payor and the recipient, and whether the commission is being paid by reason of that relationship. It is significant to note that an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed; it is sufficient that he has the right to do so. The right to discharge is also an important factor that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in very case, are furnishing the tools and furnishing of a place of work to the individual who performs the services.

A typical situation where a commission is paid under an employer-employee relationship is when the employee receives sales commissions, profit shares, performance bonuses or incentives in addition to salary. These fees are typically considered supplemental compensation.

In cases where a commission is paid by reason of an employer-employee relationship, the commission should be treated as employee compensation. Based on existing tax rules, “compensation” includes all remuneration for services, however designated, including salaries, wages, emoluments and honoraria, allowances, commissions, fees—including director’s fees, taxable bonuses and fringe benefits. Thus, the commission would be subject to the withholding tax applicable to salaries of employees. However, this commission would not be subject to value-added tax or other business taxes.

On the other hand, commissions paid for the services of a person other than an employee are subject to the expanded/creditable withholding taxes. The withholding-tax rate, however, would depend on the nature of activities rendered by the recipient. Regardless of the amount, a creditable withholding-tax rate of 10 percent is imposed on gross commissions or service fees of customs, insurance, stock, real estate, immigration and commercial brokers and fees of agents of professional entertainers. The same rate is applied on gross commissions, rebates, discounts and other similar considerations paid or granted to independent and/or exclusive sales representatives and marketing agents and subagents of companies, including multilevel marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative.

Other than these specific types of activities, the commission may be classified as professional, promotional and talent fees or any other form of remuneration for services rendered. As such, depending on the amount of income of the recipient, the withholding-tax rate may either be 15 percent or 10 percent.

Regardless of the applicable withholding-tax rate, the creditable-taxes withheld, as the term suggest, are creditable against the income tax due of the recipient. The recipient is, therefore, required to report the commission income in his income-tax return and claim the taxes withheld as credit.

Likewise, as an income derived from the performance of services, the commission should be subject to the value-added tax or to a 3-percent percentage tax, as the case may be. Whether subject to value-added tax or to percentage tax, the payee, as a rule, is required to issue duly registered receipts to cover all receipts of commissions.

Given the difference in the tax treatment of commissions, it pays to know these tax effects so that attendant compliance requirements imposed by the tax authorities are fully satisfied by both the payors and payees of commissions. Through this article, we hope we are able to help clarify the tax treatment of commissions for the proper guidance of

concerned taxpayers.