Does Commission Get Taxed? How Your Pay Is Affected

Commission income, often structured as payment based on sales or performance, is generally subject to taxation. Whether it supplements a regular salary or constitutes an individual’s primary earnings, commission is considered taxable. The specific tax obligations vary depending on the recipient’s employment relationship.

Understanding Commission as Taxable Income

Commission income is recognized by the Internal Revenue Service (IRS) as ordinary income, similar to standard wages or salaries. It is compensation for services rendered and subject to federal income tax. Any earnings received for work performed are part of an individual’s gross income, which is the starting point for calculating tax liability.

The tax treatment of commission income is directly influenced by whether the recipient is classified as an employee or an independent contractor. Though the income is taxable in both cases, the method of taxation and reporting requirements differ significantly. Understanding one’s employment status is important for navigating these tax implications.

Commission Taxation for Employees

When an individual earns commission as an employee, these payments are treated as supplemental wages. Employers withhold various taxes from commissions, including federal income tax. This may be withheld using an aggregate method (combining commission with regular wages) or a percentage method (applying a flat rate, such as 22% for amounts under $1 million).

Beyond federal income tax, employers also withhold FICA taxes, which fund Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% on earnings up to $176,100, and the Medicare tax rate is 1.45% on all covered earnings. Employers match these contributions, sharing the 15.3% combined FICA tax with the employee. All commission income, regular wages, and withheld taxes are reported on Form W-2.

Commission Taxation for Independent Contractors

Independent contractors receiving commission income are considered self-employed. They are responsible for paying their own income and self-employment taxes. Self-employment tax covers Social Security and Medicare contributions, amounting to 15.3% of net earnings from self-employment for 2025 (12.4% for Social Security and 2.9% for Medicare). The Social Security portion applies to earnings up to $176,100 for 2025, while Medicare has no wage limit.

Businesses paying $600 or more in commission to an independent contractor must report this on Form 1099-NEC. Independent contractors must make estimated tax payments quarterly to cover their income and self-employment tax liabilities, helping avoid underpayment penalties. They may also deduct ordinary and necessary business expenses against their commission income, reducing taxable income.