How Commission Income Is Taxed

Earning a commission income is like the icing on the cake for a job well done. Whether you’re a sales manager that’s just closed a major deal or a real estate agent who’s recently sold a high-end home, your commission check serves as a lucrative supplement to your regular wages. But your commission earnings are taxable like regular earnings. Here’s how commissions are classified by the IRS and how they’re taxed.

A financial advisor can walk you through different tax planning strategies to minimize your tax liability.

How Does the IRS Treat Commissions

When it comes to taxes, the IRS views commission income as regular earnings, meaning it’s fully taxable just like wages or salary. Whether you earn commissions as an employee or an independent contractor determines how your taxes are withheld and reported. Understanding this distinction is key to managing your tax liability and avoiding surprises at filing time.

For employees, commissions are considered supplemental wages, additional income paid on top of a base salary or hourly wage. Employers are required to withhold federal income tax, Social Security and Medicare just as they would for your regular paycheck. Depending on your company’s payroll system, commissions may be taxed using a flat supplemental rate (typically 22%) or combined with your regular wages and taxed based on your total income for that pay period.

Independent contractors, on the other hand, are responsible for paying their own taxes on commissions since they don’t have an employer withholding them. These earnings are reported on Form 1099-NEC, and you’ll owe both income tax and self-employment tax, covering the employee and employer portions of Social Security and Medicare. Because no taxes are automatically withheld, it’s important to make estimated quarterly payments throughout the year to avoid penalties.

Commissions can also affect your overall tax bracket since they increase your total annual income. A particularly strong sales year could push you into a higher bracket, increasing the percentage of tax you pay on your top earnings. Setting aside a portion of each commission check for taxes can help you stay ahead and avoid a hefty bill come April.

How Are Commissions Taxed for Employees?

The way commissions are taxed depends on how they’re paid. If your employer treats your regular wages and commission as one combined employee wage, federal and state taxes would be withheld as usual. The total withholding would be based on your W-4 election, and it would be included on the W-2 you get from your employer at tax time.

If your commission is paid separately from your regular income, your employer is still required to withhold taxes. But the total withholding may be calculated in a different way, either using the percentage or aggregate method.

With the percentage method, your employer would withhold the supplemental tax rate of 22% on commissions under $1 million or 37% on commissions over $1 million. So for example, if you earned a $5,000 commission for closing a sale, your employer would withhold $1,100 for taxes.

With the aggregate method, your employer would add your commission to your regular wages, and the total amount would be classified as regular income. For example, if you earned a $5,000 commission and your regular wages were $5,000 for the same time period, federal and state taxes would then be withheld as usual on the $10,000 amount based on your W-4 election.

How Are Commissions Taxed for Independent Contractors?

SmartAsset: How Commission Income Is Taxed

If you’re classified as an independent contractor or a self-employed professional, the tax treatment for your commissions will be different. You’ll be responsible for setting aside the appropriate amount for taxes on your commissions and other earnings, not the company you’re doing business with.

As a self-employed professional, your total income will be subject to the self-employment tax of 15.3%, which includes a 2.9% tax for Medicare and a 13.4% tax for Social Security. State taxes and your ordinary income tax rate will also apply. Independent contractors and self-employed professionals generally pay estimated taxes each quarter.

Tax Tips if You Earn Commissions

Earning commissions can be rewarding, but it also adds complexity to your taxes. Because commission income can fluctuate and isn’t always taxed at the source, planning ahead is essential. Here are several practical strategies to help you stay organized, compliant and minimize surprises at tax time.

Track all commission income carefully: Keep detailed records of every commission payment you receive, including dates, amounts and sources. Even if your employer issues a W-2 or 1099 form, verifying that your personal records match ensures accuracy. Having organized documentation makes tax filing easier and helps if the IRS ever questions your reported income.
Set aside money for taxes throughout the year: Since commissions can increase your taxable income, it’s smart to save a portion of each payment for taxes. Independent contractors should make quarterly estimated payments to avoid underpayment penalties. Employees may also want to adjust their W-4 withholding to account for larger commission checks.
Understand how your employer withholds taxes: If you’re an employee, your company might use a flat supplemental withholding rate (often 22%) or combine commissions with regular pay. Knowing which method applies helps you estimate your tax liability accurately. Reviewing your pay stubs regularly ensures the correct amount is being withheld.
Take advantage of deductible business expenses: Independent contractors can reduce taxable income by deducting legitimate business costs like travel, marketing or professional fees. Keep receipts and records to support every deduction. While employees can’t generally deduct unreimbursed expenses, negotiating reimbursements with your employer can offset those costs.
Plan for the impact on your tax bracket: A strong sales year can push you into a higher tax bracket, increasing the percentage you owe on top earnings. Tracking your year-to-date income can help you anticipate these changes and plan accordingly. Adjusting your withholdings or estimated payments can prevent a larger-than-expected tax bill.

Earning commission-based income requires a little extra tax planning, but it doesn’t have to be stressful. By staying proactive, setting aside funds and keeping clean records, you can meet your tax obligations with confidence and keep more of what you earn. Working with a financial advisor or tax professional can also help you optimize your strategy year after year.

Bottom Line

Commissions can be a great bonus for a job well done, though these earnings are subject to taxes just like your regular income. Fortunately, if you’re a full-time or part-time employee, your employer is required to withhold the taxes from your commission payments. How they withhold taxes will depend upon how your compensation is structured. If you have specific questions about how or if your commissions are taxed, it’s a good idea to talk with your employer directly.

Generally, if you’re an independent contractor or self-employed, you’ll be responsible for paying quarterly estimated taxes to the IRS on your own. For questions about tax payments or preparation, consult with a tax professional for advice.

Financial Planning Tips

A financial advisor can help you optimize your financial plan to minimize your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The amount withheld from each of your paychecks to cover the federal expenses will depend on several factors, including your income, number of dependents and filing status. SmartAsset’s free paycheck calculator can help you figure out how much taxes are withheld.