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How to pay commissions to an ex-employee

Bryan Frey's Profile

I have an ex-employee who we let go recently, but who is still earning commissions as part of her severance package. How should I pay that person? As an employee with all state & fed tax deductions withheld, or as a consultant with no deductions? Thank you.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Severance, is a payroll option. So I'd pay that person the se way you did before they left, I.e. if commissions were W-2, them continue to pay W-2.

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

If the commissions are earned during her employment and become payable during the severance periods as part of the normal course of processing the commission, it technically is not part of the severance. It depends what was stipulated in the agreement. From an ex-employee relations perspective, you may want to make all payments as w-2 as Wayne suggested.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

The transition from W-2 to 1099 is a touchy one, and (imho) the courts haven't decided. See below for a descriptive link.
I believe that Wayne is in essence correct. If her termination agreement indicates that she can continue to "earn-out" commissions for work done during her employment, I would absolutely w-2 and withhold. It costs, but I'm pretty certain that it is the legal requirement.
Ex-employees transferring to 1099 status should be a relatively clean break, and the "severance package" makes this relatively gray. For example, acceleration of stock options upon severance is safer to w-2, even though technically they were not earned during employment. Payment for signing a "release of claims" after termination has been completed is a separate event, and I'd be more comfortable calling that non-income (I still always w-2 it, even weeks later, but it is more clearly on the non-employment side).

http://ghdcpa.com/images/uploads/https---checkpoint.riag.com-app-view-toolItem-usid225ef61b7b98.pdf

Patrick Fleck
Title: CFO
Company: AnswerLab, LLC
(CFO, AnswerLab, LLC) |

I've researched this topic previously. Commissions earned during employment that are paid following termination are W-2 income.

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