Split commissions without tax penalty?

[exofficio]

Hi all,
I was just looking at my Humana commission statement (individual medical) and realized that I need to split some of the commissions listed with a broker who provided the referrals. As I was writing out the check I realized that I was paying his split with after-tax dollars (since the carrier wouldn't split on the policy). What's the best way around being penalized with taxes... after all, the entire commission is not mine but it will appear so and I will be taxed for the full amount.

To be entirely fair, I hadn't thought of this before, I just assumed I was writing off the split as a marketing expense. But my wife insisted that I was paying tax on the full commission. Anyway, instead of getting into an argument with her I thought I'd ask the board what the deal was with split commissions as taxable income.

Thanks!

 

[Delta76]

This is an easy one, as long as the person you're doing the commission split with is licensed. If not, you can't do it anyway. Give him or her their full portion of the commission and write it off as a business expense. If the person earns more than $600 from you over the year (I would double check that number), you will have to send them a 1099.

 

[slushhhpuppie]

Hi all,
I was just looking at my Humana commission statement (individual medical) and realized that I need to split some of the commissions listed with a broker who provided the referrals. As I was writing out the check I realized that I was paying his split with after-tax dollars (since the carrier wouldn't split on the policy). What's the best way around being penalized with taxes... after all, the entire commission is not mine but it will appear so and I will be taxed for the full amount.

To be entirely fair, I hadn't thought of this before, I just assumed I was writing off the split as a marketing expense. But my wife insisted that I was paying tax on the full commission. Anyway, instead of getting into an argument with her I thought I'd ask the board what the deal was with split commissions as taxable income.

Thanks!

If the carrier sends you a $2,000 commission and you pass $1,000 of it along to your broker, you will be responsible for paying taxes on the whole $2,000.

The "cleanest" way would be to get your broker appointed with the carrier and just split the case with them.

Otherwise you would have to compensate him with a check and 1099 him at the end of the year. The one upside is that there's a nice little box on your Schedule C to deduct it.

Run the numbers- if its still beneficial to use the write off while still paying income & self employment taxes on the gross amount, go for it.