Automotive Manufacturers’ Sales Incentives
It is common practice for automotive manufacturers and automotive dealerships to provide incentive payments, including bonuses, prizes, or other awards, to individual salespeople for reaching sales goals. 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 New Vehicle Dealership Audit Technique Guide (ATG) 2004).
These payments are generally reported on Form 1099-MISC and the ATG provides the following guidance on reporting the incentive payments:
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Report the income as “other income” (for example, line 8i (Prizes and Awards) of Schedule 1 of the 2024 Form 1040).
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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.
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Any expenses associated with this income are employee business expenses that, prior to 2018, would be reported on Schedule A, subject to the 2% of adjusted gross income limitation. However, per the TCJA of 2017 these types of expenses are not deductible for years 2018 through 2025.
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Since the payments are not considered to be self-employment income, they are not subject to self-employment tax.