11/01/22 How the IRS Taxes Commission Based Income

11/01/22 How the IRS Taxes Commission Based Income: Contents

How the IRS Taxes Commission Based Income

Your commission earnings are taxable like regular earnings. Here’s how commissions are classified by the IRS and how they’re taxed.

The IRS treats commissions as supplemental income, or income you receive in addition to your regular wages. Supplemental income can also include bonuses, overtime pay, back pay and severance pay. Just as you would with your regular wages, you need to pay taxes on your supplemental income. But the way supplemental income is treated from a tax perspective depends on how your employer structures your compensation and whether you’re employed full-time or part-time, or as an independent contractor.

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.

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.

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.

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Does The IRS Tax Commissions-Based Income? (aol.com)

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