Do I have to pay tax on advance commissions?

It is common, especially in the insurance industry, for agents to receive advance commissions even though the premiums for the underlying policy haven't been paid by the policyholder yet. If you receive advance commissions or other amounts for services to be performed in the future, and you are a cash method taxpayer, you must include these amounts as taxable income for the tax year received on your tax return.

If you repay advance commissions or other amounts in the same tax year in which you received them, you reduce the amount you include on your tax return by the advance commissions repayment. The payer should report your earnings this way.

However, if you repay the advance commissions or other amounts in a later tax year, you can deduct the repayment as an itemized tax deduction on your tax return on Form 1040, Line 27 of Schedule A as a miscellaneous itemized tax deduction. If the advance commissions repayment exceeds $3,000 it is not subject to the 2% AGI floor. Because the tax law is not clear on whether amounts of $3,000 or less are subject to the 2% AGI floor if your advance commissions repayment is $3,000 or less you should claim a credit against your prior tax return by filing Form 1040X - Amended Tax Return for the prior tax year.

Related tax information about advance commissions

Tax Directory Topics:
IRS Form 1040X
Miscellaneous Itemized Tax Deductions
Income Related Questions and Answers

IRS publications about advance commissions:
For further information about advance commissions see IRS Publication 17,

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