It depends. An individual who receives commissions can be treated in the same manner as an individual who receives straight salary. In that case, the employer would withhold taxes from the individual's compensation and remit the amount to the tax authorities on the individual's behalf. The withholding would be based on the elections the employee makes on Form W-4P. Alternatively, the individual can be treated as a self-employed independent contractor, who would be responsible for remitting the taxes to the tax authorities. Special rules apply to tax withholding, including requirements to avoid excise taxes that apply to underpayment of estimated taxes.

As you may know, each taxpayer is ultimately responsible for paying his or her income taxes to the IRS and state tax authorities.

See IRS Publications 505 for more information.

Advisor Insight

Peter J. Creedon, CFP®, ChFC®, CLU®
Crystal Brook Advisors, New York, NY

The real question should be, is the person an employee or independent contractor? If an employee, it depends on your state’s employment law, but it’s likely the employer is responsible for withholding taxes on all compensation. If an independent contractor, then he is responsible for the taxes.

Employers need to be careful calling people working for them independent contractors when they are essentially performing employee functions. If the job requires regular hours and reporting to a manager, is open-ended (has no end date) and doesn’t offer any real autonomy on how or whether to work, the person stands a good chance to be considered an employee. The employer could be liable for benefits, overtime, taxes and fines by the federal or state Department of Labor for deeming them independent.