Are Commissions and Bonuses Taxed the Same?

Variable compensation, such as commissions and bonuses, forms a significant part of many employees’ earnings. These payments, while often a welcome addition to regular wages, introduce questions about their tax treatment. Understanding how these forms of income are taxed can help individuals manage their financial expectations and plan accordingly. This article clarifies the tax implications for commissions and bonuses, focusing on federal income tax, withholding practices, and other applicable taxes.

Understanding Commissions and Bonuses

Commissions and bonuses are forms of variable compensation paid to employees in addition to their regular salary or hourly wages. Commissions are typically earnings based on performance, often tied to the volume or value of sales generated or specific tasks completed. For instance, a salesperson might earn a percentage of each sale, or a recruiter might receive a fee for each successful candidate placed.

Bonuses are additional payments an employer gives to an employee as a reward or incentive. These can be based on individual performance, team performance, or company-wide success.

Federal Income Tax Application

For federal income tax purposes, both commissions and bonuses are generally treated as “supplemental wages” by the Internal Revenue Service (IRS). Supplemental wages are payments to an employee not considered regular wages, including various forms of additional compensation like overtime pay, severance pay, and awards. This classification means they are subject to federal income tax.

While the methods for withholding taxes from supplemental wages can differ from regular pay, the final tax liability on these amounts is the same as other earned income. At the end of the tax year, commissions and bonuses are added to an employee’s total taxable income and are subject to ordinary income tax rates based on their overall earnings.

How Withholding Works for Supplemental Wages

A common source of confusion arises from how federal income tax is withheld from commissions and bonuses, which can differ from regular paychecks. The IRS provides employers with two primary methods for withholding federal income tax on supplemental wages: the percentage method and the aggregate method. These methods determine the amount of tax initially taken out of the payment, not the final tax rate.

Under the percentage method, if supplemental wages are paid separately from regular wages, employers can withhold federal income tax at a flat rate. For supplemental wages up to $1 million in a calendar year, this flat rate is typically 22%. Amounts exceeding $1 million in supplemental wages within a calendar year are subject to a higher mandatory withholding rate, currently 37%. This method is often chosen for its simplicity.

Alternatively, the aggregate method involves combining the supplemental wages with the employee’s regular wages for the pay period. The employer then calculates federal income tax withholding as if the total were a single payment, using the employee’s Form W-4 information. The tax already withheld from regular wages is subtracted, and the remaining tax is withheld from the supplemental payment. This method can lead to variations in the amount withheld compared to the flat rate method, but neither method implies a different final tax rate.

Other Applicable Taxes

Beyond federal income tax, both commissions and bonuses are also subject to other payroll taxes. These include FICA taxes, which fund Social Security and Medicare. For 2025, employees generally pay 6.2% for Social Security on wages up to $176,100, and 1.45% for Medicare on all wages, with no wage base limit for Medicare. Employers match these amounts. This means that commissions and bonuses are subject to the same FICA tax rates as regular wages.

State income taxes also apply to commissions and bonuses in most states that levy income tax. While specific state tax rates and withholding rules for supplemental wages vary by jurisdiction, these forms of variable compensation are treated similarly to regular wages for state tax purposes.