It is common practice for automotive manufacturers to provide incentive payments, including bonuses, prizes, or other awards, to individual sales persons. These can be made directly to the individual or through the dealership that employs the salesperson.
Salespersons are under direct control of the dealership and are employees of the dealership and there is no employee/employer relationship with the manufacturer. Thus the payments are not wages (Rev Ruling 70-337).
These payments, whether paid directly by the manufacturer or through the dealer, are taxable but not subject to federal withholding tax or FICA (IRS Publication 3204).
These payments are generally reported on Form 1099-MISC and Publication 3204 provides the following guidance on reporting the incentive payments:
- Report the income as “other income” (line 21 of the 2016 Form 1040).
- Do Not report the income on a Schedule C, because recipients of these payments are not engaged in an individual trade or business and are therefore not self-employed. Similarly, no expenses may be taken on Schedule C to offset incentive payment income.
- Report any expenses associated with this income as employee business expenses on Schedule A. These expenses are subject to the 2% of adjusted gross income limitation.
- Since the payments are not considered to be self-employment income, they are not subject to self-employment tax.