According to the Internal Revenue Service, commission income is taxed differently than regular income, such as wages or salary. Commission pay is considered supplemental income, even if it makes up all or a large part of an employee's total income. The IRS gives two methods for calculating the proper tax withholding for commissions: a flat 25 percent withholding or the aggregate method.Continue Reading
According to Lorman Education Services, when a commission is taxed at the 25 percent flat rate, it is taxed separately from the rest of the employee's income. For example, an employee who gets paid a regular salary of $5,000 per month but receives a $1,000 commission is only taxed 25 percent on the $1,000. The other $5,000 is taxed at the employee's normal tax rate. If the same employee was taxed using the aggregate method, the entire $6,000 would be taxed at a higher percentage rather than just the $1,000 commission. If an employee is paid only with commissions, it is still considered supplemental income; however, the employer must use the aggregate method rather than the 25 percent rate.
The aggregate method allows for a change in the withholding amount based on the amount earned and the length of each pay period. If an employee earns more than $1 million in commissions in a year, the commission income earned over $1 million is subject to a mandatory 35 percent withholding, notes Lorman.Learn more about Income Tax