How the IRS Taxes Commission Income

Commission can be a great source of extra income to supplement your regular wages and help offset expenses. However, just like all other sources of income, commission income will be taxed by the government.

This post discusses how the IRS taxes commission income.

Does the IRS Consider Commission as Wages or Supplemental Wages?

The IRS generally considers commission as a supplemental wage. Supplemental wages are additional employee “wage” payments outside their regular wages. The IRS taxes supplemental wages differently than regular wages depending on how an employer pays these extra wages to the employee.

How Is Commission Taxed If You’re an Employee?

There are a few scenarios that determine how the IRS taxes commission that employees receive from their employers.

A. If Wages and Commission Combined as Single Wage: When your commission and wages are combined with the amounts not specified for each, the IRS taxes it as a single payment for a regular payroll period.

B. If Wages and Commission Separate: When your commission is paid separately from your regular wages or is combined with them but the amounts are listed separately, your commission is taxed based on one of the following withholding methods:

Percentage Withholding

A percentage approach to tax withholding requires your employer to withhold a flat 25% tax on your commission.

Aggregate Withholding

An aggregate approach requires your employer to withhold commission tax as follows:

• Step 1: When your commission and regular wages are paid together, your employer combines the two. If your wages and commission are not paid together, your employer will add commission to either (1) regular wages paid, (2) wages that will be paid in the current period, or (3) wages that were paid in the prior period.
• Step 2: Determine the appropriate income tax withholding based on the combined amount for regular wages plus commission and your W-4 allowances.
• Step 3: Calculate the income tax for regular wages.
• Step 4: Subtract the tax withheld from regular wages.
• Step 5: Withhold the remaining tax from commission.

How Is Commission Taxed If You’re Self-Employed or an Independent Contractor?

If you are classified as self-employed or an independent contractor, the tax treatment for your commission changes. Ideally, the IRS requires you to calculate and set aside the appropriate amount of taxes on your commission and regular income.

Remember, this is your responsibility, not that of your client. Your income, including commission, is subject to 15.3% self-employment tax (2.9% for Medicare and 12.4% for Social Security.)

Ordinary income tax rates and state taxes also apply. Self-employed or independent contractors often pay estimated quarterly taxes. This is challenging if your commission varies.

What Do You Do If You Earned Commission and Can’t Pay Your Extra Tax Liability?

If you receive commission and cannot afford to pay your extra taxes, you can take advantage of one of these IRS payment plans:

• Installment Agreement: The installment agreement is a long-term monthly payment plan with the IRS. You can qualify for tax debt installment payments if you owe $50,000 or less, including penalties and taxes.
• Offer in Compromise: An OIC is an “offer” you submit to the IRS to settle your entire tax debt for less than the total amount you still owe. To be eligible, you must show paying your full tax debt, even in monthly payments, will put you in a dire financial situation.
• Currently Not Collectible: CNC status temporarily stops the IRS from trying to collect unpaid back taxes. However, if approved, your tax debt will continue accruing interests and penalties.

Earning a commission can be a pleasant reward for a job well done and is a lucrative supplement to your regular wages. However, you need to pay appropriate taxes on your commission to avoid getting into tax debt problems with the IRS.

If you need help paying the taxes due on your commission income, start with a free consultation.