Understanding How the IRS Taxes Commission Income

Earning commission can be exciting, especially when it rewards your hard work in sales or services. But once tax season rolls around, many people realize they are not fully prepared for how the IRS treats commission payments. Whether you are an employee who earns commission on top of wages or an independent contractor who relies heavily on commission, it is important to know how this income is taxed.

Below, you will find a complete breakdown of how commissions are classified, taxed, and reported in the United States.

How the IRS Views Commission Payments

Commission is considered taxable income by the IRS. It does not matter if you are paid a flat amount, a percentage of sales, or tiered incentives based on performance. All commission payments fall into the category of earned income.

For employees, commission is treated as supplemental wages. For independent contractors, it is considered self-employment income. In both cases, it must be reported on your tax return and is subject to federal income tax, as well as other applicable taxes like Social Security and Medicare.

Tax Rules for Employees Receiving Commission

Employees who earn commission typically receive it through payroll. Because of this, employers are responsible for withholding federal and state income tax, along with payroll taxes.

The IRS gives employers two methods to handle commission taxation:

  1. Aggregate Method
    Commission is added to your regular paycheck. Taxes are then calculated as if you earned the full amount as one paycheck. This method can sometimes push your income into a higher tax bracket for that pay period, making the tax withholding seem larger than usual.

  2. Percentage Method
    The IRS allows employers to withhold a flat percentage of 22% (as of 2025) on supplemental wages like commissions. If your annual commissions exceed $1 million, a higher flat rate of 37% may apply.

Although it may feel like commission is taxed at a higher rate, the final tax is determined by your total annual income, not just the withholding.

Tax Rules for Independent Contractors Receiving Commission

Independent contractors do not have an employer withholding taxes for them. Instead, commission is treated as self-employment income. This means you are responsible for paying both:

  • Income tax based on your overall earnings.

  • Self-employment tax (currently 15.3%) which covers Social Security and Medicare contributions.

Since taxes are not automatically withheld, independent contractors should make estimated quarterly payments to the IRS. This helps avoid penalties and ensures you do not face a large tax bill when filing your return.

Calculating Taxes on Commission Payments

To calculate taxes on commission, follow these general steps:

  1. Add commission to your total income for the year.

  2. Apply your tax bracket to determine federal income tax owed.

  3. Factor in payroll taxes (for employees) or self-employment tax (for contractors).

  4. Subtract withholdings or estimated payments you have already made.

For example, if you are an employee earning $50,000 in base salary plus $10,000 in commission, your taxable income is $60,000. Your employer’s method of withholding will impact your paychecks, but your actual tax liability depends on your total income.

Independent contractors can also deduct certain business expenses related to earning their commission. This can lower taxable income and reduce the overall tax owed.

What if Taxes Were Not Withheld from My Regular Wages?

If your employer did not withhold taxes from your wages or commission, you are still responsible for paying the correct amount to the IRS. This might happen if there was an error in payroll or if you are classified as an independent contractor instead of an employee.

In these cases, you should:

  • Review your pay stubs to confirm missing withholdings.

  • Adjust your W-4 form if you are an employee.

  • Make estimated tax payments if necessary.

  • Work with a tax professional to avoid penalties or surprises at tax time.

Payroll Taxes and Commission

Yes, payroll taxes apply to commissions for employees. Social Security and Medicare contributions are withheld the same way they are for regular wages. This ensures that commission earnings count toward your future retirement and healthcare benefits.

For independent contractors, the equivalent is the self-employment tax, which must be calculated and paid directly.

Why Does It Feel Like Commission Is Taxed Higher?

Many people believe commission is taxed more than their base salary. The reason is usually tied to withholding methods. When the percentage method is used, a flat 22% rate may be withheld, which could be more than your actual effective tax rate.

At the end of the year, your true tax is based on your total income. If your effective tax rate is lower than the flat withholding rate, you may receive a refund. If it is higher, you may owe more.

The key takeaway is that commission is not taxed at a different rate than other income. It is simply subject to different withholding rules during payroll.

Getting Professional Guidance

Taxation on commission can be complex, especially if you are balancing a salary, bonuses, and self-employment income. Working with a professional tax advisor ensures you understand your obligations and maximize your deductions.

At Zuazo & Associates, we specialize in helping individuals and businesses manage commission income, payroll, and overall tax planning. Our team can assist with everything from calculating quarterly payments to filing accurate returns. Contact us today at (714) 929-1828 or visit Zuazo & Associates to schedule a consultation.

Final Thoughts

Commission income can be rewarding, but it also brings unique tax challenges. Understanding how the IRS views these payments, the difference between employee and contractor rules, and the impact of payroll taxes helps you stay ahead of the game. With careful planning and professional guidance, you can avoid surprises and keep more of what you earn.