Commission based income - budget questions

[countthestars]

H's income is primarily made up of commission pay with a small base ($Xk base).  His sales commission varies widely and we have absolutely no idea how much money he will make in any given year.  In 2012 he made $1.5Xk commission.  In 2013 he made $3Xk commission.  I make approx $2Xk.  We are getting back a lot of money in taxes ($11k) partly because we bought a house and had a kid, but also because I have no idea how to set our with holdings.  We also SUCK at budgeting and have way too much money in savings because we have no idea how much money is going to come in every month.  The only somewhat sure thing is that summer is always higher than winter due to town/city fiscal years.  Additionally, we were funding our house build OOP + reimbursements for the past 1.5 years so we haven't followed a budget.

H base pay: $Xk
My pay: $2Xk
H expected commission for 2014 - $1.5Xk to $4Xk+


My questions:

If commission makes up a large part of your income, how do you estimate your taxes? 

What do you budget off of? 

How much would you keep in liquid savings?  More than 3 months + small buffer for lower months?  We've never had a month that we would have had to pull from savings to cover our expenses and don't carry a balance on our CCs.


Edit - deleted numbers

[vanillacourage]

I don't know anything about taxes b/c DH and I have both always been salaried.

I would try to figure out what his average has been over the last 12 months and budget on that.

For savings, I would try to keep 4-6 months, so that if you do have some sort of big financial hit on one of your DH's lower months, it wouldn't be a disaster.  If (and forgive me if you addressed this) you have high-limit CC's without current corresponding debt, you could keep it to 3 months savings and know you have the CCs to bail you out if necessary.

[Deleted]

I would budget based upon your lowest average month in 2013.

ETA: I would keep probably $20-25k in savings, and invest the rest.

[sicilygirl]

I don't work off of commission. but I'm a CPA and have clients who do. When I do their tax return, I create estimated payment vouchers for them based on their prior year income, unless they already have a reason to expect that it will be vastly different. Then, each quarter, we evaluate where they are based on how their year is going (and especially in December) and make adjustments to their estimated payments at that time. You could always use the IRS's withholding calculator to do this for yourself each quarter. It shouldn't take too long. I would just set up your H's withholding from his paycheck to be based on his salary only and use ES payments to take care of the commission income.

As for the savings, I would keep 3-6 months in cash based on your comfort level. Probably on the lower end of that since you have a good track record of being able to cover your monthly expenses regardless of how much you actually bring in that month.

[countthestars]

Thanks for the feedback vanillacourage and @mrsspunky. Would you leave out vacations/gifts/car savings/529s in that budget and fund that through the better months, or would you keep those as line items in the monthly budget and then allocated additional commission as it comes in?

[sillygoosegirl]

If possible, I'd budget all necessities and committed expenses off the $27K + $50K, and use the commissions for savings and fun money. I follow the recommendation to save at least 40% of your income (combination of retirement, long term, short term, and save-to-spend), which in a bad year would be more than the minimum commission you expect your DH to make.

With taxes, can you claim more exemptions or something to your W4s to lower your withholdings, and then send quarterly estimated taxes if his commissions are significantly higher than expected? You should be able to go on the IRS website and get estimates throughout the year to see if you are about where you should be on your withholdings.

[countthestars]

Feb 20, 2014 10:41:23 GMT -5 sicilygirl said:

I don't work off of commission. but I'm a CPA and have clients who do. When I do their tax return, I create estimated payment vouchers for them based on their prior year income, unless they already have a reason to expect that it will be vastly different. Then, each quarter, we evaluate where they are based on how their year is going (and especially in December) and make adjustments to their estimated payments at that time. You could always use the IRS's withholding calculator to do this for yourself each quarter. It shouldn't take too long. I would just set up your H's withholding from his paycheck to be based on his salary only and use ES payments to take care of the commission income.

As for the savings, I would keep 3-6 months in cash based on your comfort level. Probably on the lower end of that since you have a good track record of being able to cover your monthly expenses regardless of how much you actually bring in that month.

Thanks!  This is helpful.  We don't currently have a CPA or financial adviser so we are thinking of hiring one or both.  Would you recommend starting with one over the other?  I am not fully aware of the benefits of one over another, with the exception of the FA being able to help us invest.

[Deleted]

Have you looked into YNAB? Basically you use last month's $$ to pay this month's expenses.

[Pom]

No advice on taxes, but back when Mr. Pom worked in the field, our income could vary widely month to month. I tracked our income in excel and eventually created an "average" budget based on expenses/income after a year or so. He made so much in overtime, bonuses, per diem, that it was ridiculous to only budget on the base. As sicilygirl suggested, we also kept about 6 months in cash to float the lean months with big expenses.

[sicilygirl]

Feb 20, 2014 10:46:48 GMT -5 countthestars said:

Feb 20, 2014 10:41:23 GMT -5 sicilygirl said:

I don't work off of commission. but I'm a CPA and have clients who do. When I do their tax return, I create estimated payment vouchers for them based on their prior year income, unless they already have a reason to expect that it will be vastly different. Then, each quarter, we evaluate where they are based on how their year is going (and especially in December) and make adjustments to their estimated payments at that time. You could always use the IRS's withholding calculator to do this for yourself each quarter. It shouldn't take too long. I would just set up your H's withholding from his paycheck to be based on his salary only and use ES payments to take care of the commission income.

As for the savings, I would keep 3-6 months in cash based on your comfort level. Probably on the lower end of that since you have a good track record of being able to cover your monthly expenses regardless of how much you actually bring in that month.

Thanks!  This is helpful.  We don't currently have a CPA or financial adviser so we are thinking of hiring one or both.  Would you recommend starting with one over the other?  I am not fully aware of the benefits of one over another, with the exception of the FA being able to help us invest.

I would start with the CPA since you are still trying to get a handle on your tax situation.  And I'd ask the CPA for a recommendation on a financial adviser, if your feel like you need help with that as well.

[SJ]

How often is he paid this commission? Weekly? Monthly? Yearly?

I would put together a budget of your bare bones expenses each month.

How does that compare to your bare bones take-home? (No commission at all)

If your bare bones take-home is not enough to cover bare bones expenses, then you will need to transfer xx over from savings any month that you don't make enough to cover the expenses.

Then make a list of the "extras"- vacations/gifts/car savings/529/charitable giving/retirement whatever. Prioritize those and attack them with any extra cash and/or commissions that you receive.

My bonus compensation is substantial. We use it to finish off Roth IRA's, charitable giving pledges, savings, HSA, 529, whatever. If we dip into savings at other times, we replenish with the bonus pay.

Does he have any taxes withheld from the commissions? If not, I would save 20% or so in a separate account for quarterly tax estimates. As sicilygirl mentioned, try to have the withholdings cover salary and then estimates can cover commission revenue.

I also absolutely recommend hiring a CPA.

The FA depends on what you are looking for. Are you looking for a financial planner to review and give you guidance? Or are you ready for an investment manager who will manage and execute trades on your behalf? This person should communicate and work closely with your CPA to avoid any surprises at tax time.

[countthestars]

Feb 20, 2014 11:10:04 GMT -5 SJ said:

How often is he paid this commission? Weekly? Monthly? Yearly?

I would put together a budget of your bare bones expenses each month.

How does that compare to your bare bones take-home? (No commission at all)

If your bare bones take-home is not enough to cover bare bones expenses, then you will need to transfer xx over from savings any month that you don't make enough to cover the expenses.

Then make a list of the "extras"- vacations/gifts/car savings/529/charitable giving/retirement whatever. Prioritize those and attack them with any extra cash and/or commissions that you receive.

My bonus compensation is substantial. We use it to finish off Roth IRA's, charitable giving pledges, savings, HSA, 529, whatever. If we dip into savings at other times, we replenish with the bonus pay.

Does he have any taxes withheld from the commissions? If not, I would save 20% or so in a separate account for quarterly tax estimates. As sicilygirl mentioned, try to have the withholdings cover salary and then estimates can cover commission revenue.

I also absolutely recommend hiring a CPA.

The FA depends on what you are looking for. Are you looking for a financial planner to review and give you guidance? Or are you ready for an investment manager who will manage and execute trades on your behalf? This person should communicate and work closely with your CPA to avoid any surprises at tax time.

Thanks for chiming in!  He gets paid commissions monthly (one base check per month, one commission check per month).  Taxes are taken out of every check.  I will start with the bare bones budget and see where we're netting out vs. our lowest ever month.  It looks like we really need to get serious about budgeting more closely.  We tend to just pay for things as they come up and have been very fortunate to not "have" to budget but I'm sure we are wasting a lot of money because of it. We will start with a CPA and then see how much money we have to play around with.  I think we will want someone to manage and execute trades since we have no idea about the stock market.