Commission can be a great source of income on top of your reasonable regular wages. But, just like every other income stream, commission must be taxed.
How it’s taxed can go a few ways, but let’s look at commission through the eyes of the Internal Revenue Service first.
What does “commission” mean to the IRS?
The IRS considers commission as “supplemental wage,” or wages given to employees outside their regular wages. A bonus check, any compensation for overtime, back pay, severance pay, awards or prizes, and payments for nondeductible moving expenses are just a few examples of supplemental wages. The method chosen for taxation depends not only on whether your employer withholds taxes from regular pay but also on how your commission and regular wages are paid to you.
Calculating Commission Taxes
There are a few scenarios that will determine how much will be withheld from your commission. If your supplemental income is included in your regular pay with the amounts not specified for each, it’s taxed normally as a single payment for a regular payroll period, according to federal and state withholdings.
If your employer withholds taxes from your regular pay, and your commission is paid to you separately from your regular pay – or is combined with regular pay, but the amounts are individually listed – your employer can choose one of the following ways of withholding.
- Percentage Approach to Withholding: In this case, your employer can withhold a flat 25% tax on your commission.
- Aggregate Approach to Withholding: For the aggregate approach, there are a few more steps your employer will have to take:
- If the supplemental wages are paid at the same time as the regular wages, your employer will add regular and supplemental wages together. The IRS states that if there are no wages paid at the same time as the supplemental pay, your employer must add the supplemental to either the regular wages already paid or wages that will be paid for the current payroll period or to the wages paid in the preceding payroll period.
- Your employer must then figure the income tax withholding as if the total of the regular and supplemental funds are a combined single payment using your number of personal allowances claimed on your Form W-4 in conjunction with IRS Publication 15.
- Your employer will find the tax amount for just the regular wages.
- Your employer will subtract the tax withheld from the regular wages.
- Lastly, your company will withhold the remaining tax found in Step 4 from the supplemental wages.
Did Your Employer Withhold Taxes from Regular Wages?
If your employer did not withhold tax from your regular wages in the current or immediately preceding calendar year, they could still use the above aggregate approach. Regardless of the method your employer uses to withhold income tax on supplemental wages, they are still required to withhold Social Security and Medicare from your supplemental wages as well.
The information in this article is up to date through tax year 2021 (taxes filed 2022).