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Ask Lane Your Own Question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3987
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Say a recoverable draw of $100,000 is paid to a W-2 employee,

Resolved Question:

Say a recoverable draw of $100,000 is paid to a W-2 employee, who then has their personal income taxes taken out of their pay. Say after taxes were withheld, the employee received $65,000. After termination and the draw is owed back, is the employer able to collect the full draw of $100,000 or only the $65,000 net pay the employee received after taxes?
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Lane :

Hi, Your W-2 and the end of the year should have the correct totals for earnings for the year

Lane :

The draw is part of your earnings (and any you have to return should reduce your earnings).

Lane :

Though considered salary and taxable, recoverable draws are much like no-interest loans and must be paid back. In pay periods when earned commissions are less than the contracted draw, the draw account is tapped to compensate for the difference. Draw tap debt accumulates through every pay period used. When sales commissions exceed the contracted minimum, paid draws are deducted from pay in increments that do not reduce remuneration below contract until there is a zero balance. Commissions are paid in full once the draw account is paid in full.

Lane :

At least that's the typical scenario

Lane :

If you've crossed over a year, you may need to get a corrected W-2

Lane :

Make sense?

Customer:

Say only $10,000 of commissions were earned, so the recoverable draw is $90,000. The total $90,000 is owed correct? Income taxes withheld from the employee are irrelevant, correct?

Lane :

You'd either handle that in two ways (if you've already crossed over the year, and received a W-2 reflecting the withholding) the employer must issue a corrected W-2. OR if the company cannot or will not get it's own over-payment back and issue a corrected W-2 you can always do an amended return for the year and get the refund.

Customer:

I was told that taxes withheld are deducted from the draw owed. This makes no sense to me, since the amount loaned was really the $90,000 and personal income taxes would be my personal responsibility and have nothing to do with the amount I owe. If the employer can't go after the full $90,000, where could I find documentation on that?

Customer:

Does the employee owe $90,000 ($100,000 draw minus $10,000 commissions earned) or only $55,000 ($100,000 draw minus taxes withheld of $35,000 minus $10,000 commissions earned)?

Lane :

No, the way that works is that the company is simply paying the taxes to the government on your behalf ... they do that as part of their quarterly payroll reporting and payments ... It's tied to YOUR social security number ... it's simply a pre-payment of your taxes

Lane :

The company SHOULD , just as an individual, submit an amended 940 to get that back and only capture what you actually owe them the 55,000 in your example

Lane :

one of the biggest penalties out there is withholding from a payroll and not remitting it to the govt

Lane :

They should either make the adjustment on the final W-2 and only come after what they are owed bu YOU and get the rest back from the government

Lane :

OR I suppose if they refuse to do the amended return you could do your own... either they have remitted that to IRS in their quarterly payroll or their stealing... thats the way it works

Lane :

You can always get a transcript of your tax account here: http://www.irs.gov/Individuals/Order-a-Transcript and see if they've been remitting your withholdings as they should

Customer:

My question is what is the actual amount that I owe? Do I owe $90,000 (draw minus commissions earned) or do I owe $55,000? If it's only $55,000 it seems wrong that the company would have to pay for my personal taxes paid in.

Lane :

Again, the taxes paid in are just that a pre-payment of your taxes ... you'll need to talk to your employer about the mechanism for getting that back ... IF they've been keeping it legal, they've paid that to the government already on your behalf (It's YOUR money, but they don't have it any more) ... In my experience (I started out in commission sales as a stock broker MANY MOONS ago) they will only ask you to pay bad the 55,000 because they will amentheir own payroll tax return and get back the withholdings from IRS for themselves

Lane :

The only other two options are (1) They're incompetent, don't know how and you can get this overpayment back from the govt yourself, by doing an amended return showing that you did not actually earn that money or (2) they're stealing the money

Lane :

I think hat will happen is they will only ask you for the 55,000 and get their overpayment back from the IRS themselves ... THIS is the conventional way it's done

Customer:

I would assume I owe $90,000 (draw minus commissions). I would think my taxes withheld have nothing to do with the amount I owe. I ask, because I received advice that a company can only go after the net cash the employee received. I did not believe that advice, because it seems wrong that the company would be penalized and now not owe $35,000 that were simply sent in on my behalf. What is the legal amount the company go after me for?

Customer:

How can they get the overpayment of income taxes back?

Lane :

No, again the advice is correct

Lane :

Hang with me here...

Customer:

The advice is correct? Then how does the employer go about getting all of the taxes that were paid in refunded to them?

Lane :

Yes

Lane :

The have been paying in those taxes as a part of they quarteryly payroll taxes fling to the irs

Lane :

They simply do an amended filing and the IRS givrs them a refund, just as they wold an individual on a form 1040 who overpaid

Customer:

So a company can file an amended return asking for all the taxes back and then on my W-2 it would show no taxes paid in?

Lane :

Thats exactly right

Lane :

Your W-s will show only what you actually earned

Lane :

sorry "W-2"

Lane :

it will show the appropriate withholding for $10,000 in your example

Customer:

What if my termination was in 2013 and I already filed my 2012 income taxes using my draw amount as income and taking the taxes paid in off of my tax balance?

Lane :

You will file an amended return (1040x) showing the change in income amount, and using the explanation box to state that this income was paid back

Lane :

in the form of a recoverable draw

Customer:

so then the company can still file an amended return for 2012 asking for my taxes refunded to them?

Lane :

Don't do it until you've actually paid it back though ... it's pretty common in the industry for companies to write that off and take their OWN tax deduction, meaning that you DID actually receive the income ... IRS will tax SOMEONE

Lane :

Yes they can ... and if recoverable draw is something they've been doing for a while, this will be standard operating procedure

Lane :

Still with me?

Lane :

Questions?

Customer:

sorry. the company hasn't done any recoverable draws until me.

Lane :

sOK ... Sounds like you want to do the right thing .. Maybe you can educate THEM ... Again, if they've been paying in the taxes as they should, they simply cleect from you what YOU own them and from IRS what IRS owes them

Customer:

they don't seem to really know what they're doing regarding draws. They thought I owed $90,000, because they did not know they could get a refund of the taxes.

Lane :

:) looks like our posts crossed

Lane :

Again, there are only two possibilities here, they have been withholding and NOT paying the money into IRS (in which case there's nothing to recover there) and they still need to get that net 55,000 from you ... OR ...

Lane :

They file for a refund with IRS and get the 55,000 from you

Customer:

I do want to do the right thing. :) I should tell them to file amended taxes to get the taxes paid in back, amended my W-2, and my loan amount is only the net cash received.

Lane :

That's right .. that is how i's normally done

Customer:

Thank you!!!!! Now it makes sense. I couldn't understand why the company would be penalized for paying in my taxes, but I also didn't know they could recover them.

Lane :

Yep, in this scenario they are called a withholding agent, but they are entitled to any overpayments just as anyone else

Lane :

If this HAS helped, I'd appreciate positive rating here... that's the only way I get credit for my work

Lane :

But, come back here if you have other questions, so you won't be charged for another question

Lane :

Thanks,

Lane :

Lane

Customer:

Thank you! Where do I come back? Or rather how do I?

Lane :

once you've rate this all stays here ... You can see it on our account (Home) page OR you cna just come straight back this this Page: http://www.justanswer.com/tax/83kvc-say-recoverable-draw-100-000-paid-w-2-employee.html

Lane :

Some, copy that link into a word document OR you can just save this page as a favorite, bookmark it, in your browser

Lane :

Also, if you'd like to use me as your expert on a different, new, question, just say "For Lane only," at the beginning of the question or you can set me up as a preferred expert on your home page, as well

Lane :

... hope this has helped

Lane :

Can I help with anything else today? (Sorry just would like to move on to help others) ... If you're done here

Customer:

thanks!!!! all done!

Lane :

Great ... have a good one .. enjoyed working with you

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3987
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.

 

 

Hi Nancy,

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below

 

Thanks,

Lane

 

Expert:  Lane replied 10 months ago.
Thanks so much Nancy,

Let me know if I can help further.

Lane

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