Are Commissions Taxed Differently Than Salary?

Many individuals earning income through performance-based pay wonder if their commission checks are taxed more heavily than a regular salary. This question arises from observing the different amounts withheld from various paychecks. While a salary is a fixed payment, a commission is variable and directly tied to sales or other performance metrics. Understanding the tax implications of these payment structures is important for financial planning.

The Fundamental Tax Treatment of Income

From a foundational perspective, the Internal Revenue Service (IRS) does not tax income from commissions differently than income from a salary. Both are considered ordinary income and are subject to the same tax rules. When you file your annual tax return, all earnings from salary and commission are added together to determine your total gross income, which is then taxed according to progressive marginal tax brackets.

This equal treatment also applies to payroll taxes. Both salary and commission earnings are subject to Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare at the same rates. The perception of a difference in taxation stems not from the final tax owed, but from the method used to withhold taxes from a given paycheck.

Understanding Tax Withholding on Commissions

The main reason commission payments often seem to have more tax taken out is due to how employers handle tax withholding. The IRS classifies commissions as “supplemental wages,” which are payments made to an employee outside of their regular pay. This category also includes bonuses, overtime, and awards. Because these payments are not part of a standard salary, employers use a different method to calculate the income tax to withhold.

One common approach is the percentage method. Under this method, an employer withholds a flat 22% for federal income tax on supplemental wages. This flat rate is applied to the entire commission payment, regardless of the employee’s regular pay rate or the information on their Form W-4. For supplemental income that exceeds $1 million in a calendar year, the withholding rate increases to 37%. This high flat rate is frequently why a commission check can look smaller than expected.

An alternative approach is the aggregate method. This involves combining the commission payment with the employee’s regular wages for that pay period. The employer then calculates the required income tax withholding on the total amount as if it were a single, regular payment, using standard tax tables and the employee’s Form W-4 information. Regardless of the method used for federal income tax, the employer must also withhold the standard Social Security and Medicare taxes from the commission payment.

Reconciliation on Your Annual Tax Return

The differences in withholding between salary and commission payments are reconciled when you file your annual tax return. At the end of the year, your employer provides a Form W-2, which reports your total earnings and all taxes withheld. Box 1 of the W-2, “Wages, tips, other compensation,” shows a single figure that combines your salary, commissions, and any other taxable compensation. Box 2 of the Form W-2 reports the total federal income tax that was withheld throughout the year from all pay sources.

When you complete your Form 1040, you use the total income figure from Box 1 to calculate your actual tax liability for the entire year based on your filing status and the applicable tax brackets. After determining the total tax you owe, you subtract the total amount withheld as shown in Box 2. This final step reveals whether you have overpaid your taxes, resulting in a refund, or underpaid, meaning you owe an additional amount. At this stage, the distinction between salary and commission income is gone.

The Independent Contractor Distinction

The tax situation changes significantly if you earn commissions as an independent contractor. An employee receives a Form W-2, while an independent contractor receives a Form 1099-NEC for nonemployee compensation; this distinction is based on factors like behavioral and financial control, not just a title. When a company pays a commission to an independent contractor, it does not withhold any taxes. The contractor receives the gross amount and is personally responsible for paying all applicable taxes directly to the IRS.

This includes federal income tax and self-employment taxes, which cover both the employee and employer portions of Social Security and Medicare taxes at a rate of 15.3%. To meet these obligations, independent contractors must make estimated tax payments to the IRS throughout the year. These payments, made quarterly using Form 1040-ES, cover both income and self-employment tax liability, and failure to make them can result in penalties. This places the full burden of tax calculation and remittance on the contractor.