Do you work a job where you earn a salary and commission? Have you got yourself wondering why your commission is taxed differently?
A commission is considered a “supplemental wage” by the Internal Revenue Service (IRS). The IRS defines supplemental wages as wage payments to an employee outside of his or her regular wages. This includes bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses.
The taxes are calculated based on how your employer pays you normally. For example, if your bonus or commission is included in your regular pay, then it’s taxed according to normal federal and state withholding. If you receive it outside your regular paycheck, then it becomes supplemental and your commission is taxed at a rate of 25%.
Employers are still required to withhold Social Security and Medicare from these wages too. Full details on supplemental wages can be found in Publication 15 (Circular E) from the IRS:
- "Supplemental wages combined with regular wages. If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period."
- "Supplemental wages identified separately from regular wages. If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages.
1. If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages.a. Withhold a flat 25% (no other percentage allowed).b. If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
2. If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes."
Receiving commission or bonus soon and want to see how much you'll earn? Use our Bonus Calculator here.