The IRS treats commission payments as supplemental wages. This puts commissions in the same category as bonuses, allowances, back pays, sick leave pay and overtime pays, notes Patriot Software.
Calculating Tax on Commission Tax on commissions depends on whether the commission is taxed separately or as part of the total pay. The IRS has two methods for calculating commission tax, states ASAP Accounting & Payroll. These are the flat tax rate method and the aggregate method. Both taxation formulas apply where the commissions paid do not exceed a sum of $1 million.
The flat tax rate method is applied if the commission is paid separately from the regular wage. If the commission paid is below $1 million, a flat tax rate of 25 percent is levied on the commission. However, there's an exception where the commission is paid within the same period as taxable income. If the employer levied a tax on income, then tax on commission becomes optional.
If a flat tax rate can't be applied, then the aggregate method is used. This formula is relevant if the commission is paid as part of the regular wage. Within that payroll period, the employer is supposed to get the total of regular income and commissions paid, and then use a normal income tax rate on the resulting total.
The two methods may not apply where the commissions paid exceed $1 million. In such a case, the IRS uses a flat rate of 35 percent as the tax on commissions exceeding $1 million. However, this flat rate isn't applicable if the $1 million is a sum total of all commissions within that payroll period.
Managing Tax on Commission as an Employee Employers are allowed by the IRS to make other deductions on commission besides income tax. This includes deductions like Medicare, 401(k) contributions and Social Security deductions. In addition, the IRS requires employers to make the deductions on income, commissions and any other supplementary wage paid to employees.
This is why taxes on commission income tend to be high in the United States. Fortunately, taxpayers can use various techniques to pay lower taxes on commissions. These techniques apply especially for employees paid solely on commissions.
Employees working commission-only jobs can manage tax levied by making deductions on gross income. All work-related expenses can be deducted from the gross income including all unreimbursed expenses such as travel costs, hotel costs, cost of eating at restaurants and printing expenses. This means taxpayers are allowed to deduct any expense incurred while being paid on commission.
Taxable Income Bracket
It's important for employees to be aware of their current tax brackets, especially if they don't receive fixed wages or commissions. In addition, they should ensure the changes in commission income reflect with the records held by the IRS.
Professional accountants can help employees who earn income on commissions to determine the most appropriate tax rates on their commissions. They can also help professionals determine their deductions so they can save on taxes. It's important to know deductions such Social Security and Medicare are different for permanent employees and contracted workers. Contracted workers are guided by the Self-Employment Contributions Act tax when paying taxes, while permanent employees follow the Federal Insurance Contribution Act when paying taxes, notes The Balance.