I work for a small company in sales and I am paid a base and commission. In 2004, I was only paid commissions for only the commissions I earned in first half of the year. I was not paid any commissions in 2005. The company -- like most small companies -- was running on a wing and a prayer, but we finally got the big contract just a few months ago. I am now looking at getting my commissions for the period starting in July 2004 through today.

My question -- I am going to get this commission in a lump sum which is going to throw me into a high tax bracket. Since I was earning the commission incrementally throughout 2004, 2005 and 2006, could I adjust my previous tax returns for 04 and 05 so that I can spread the commission out (as it should have been paid) and keep myself in a lower bracket?

Thanks!

Negative. That is income averaging, which has not been allowed for regular folks for over 20 years.

I assume you have NOT claimed the accrued income on your 2004 and 2005 tax returns. Unless you had that foresight, I can see no way for you to spread the income out over three years.

Thanks for your prompt reply -- so let me get this straight... the company couldn't pay me even though I had earned (on paper) the commissions in '04 and '05. Because I'm getting paid in one lump sum in '06 -- Uncle Sam will assume for tax purposes that I earned it all in 2006 and hit me at the higher rate... ouch! Is there really nothing I can do (or have the company do) to adjust my previous wages.

So in the future -- I need to account for those commissions in my taxes even though I haven't been paid them. Out of curiousity, if I had accounted for the commissions in my '04 and '05 returns and I wound up not getting paid because the company went under, could I have gone back and adjust my wages down so that I don't pay taxes on wages never earned.

The bottom line on this is your accounting method. If you use the CASH accounting method (which is what 97% of all individuals and businesses use), then you pay taxes on income when you GET it.

If you use the ACCRUAL method, then you pay taxes on income when you EARN it. If you never get paid,then you could back and adjust your salary downward.

I assume you are on a CASH basis, so you must pay the taxes at the higher rate.

Sorry about that!