Automotive Manufacturers’ Sales Incentive
It is common practice for automotive manufacturers to provide incentive payments, including bonuses, prizes, or other awards, to individual salespersons. 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:
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Report the income as “other income.” Because Pub 3204 was issued long ago and hasn’t been updated recently, the publication doesn’t specify the entry line to use, but we suggest line 8h, Prizes and Awards, on Schedule 1 (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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For years other than 2018 through 2025, 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 and their deduction was suspended by the TCJA.
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Since the payments are not considered to be self-employment income, they are not subject to self-employment tax.