If you’re in sales, real estate, recruitment, or any profession that pays bonuses or commissions, you’ve probably wondered: How much is commission taxed? Unlike a regular salary, commissions are considered supplemental income by the IRS and may be taxed differently.
In this article, we’ll break down how commissions are taxed in the U.S., how much is withheld, and how you can maximize your take-home pay while staying compliant with tax laws.
What Is Commission Income?
Commission is compensation paid based on performance—usually a percentage of a sale or revenue goal. Common commission-based roles include:
- Real estate agents
- Sales representatives
- Insurance brokers
- Recruiters
- Affiliate marketers
- Freelancers or consultants (with performance incentives)
Commissions can be paid as a standalone check or combined with your regular paycheck—and how it’s taxed depends on this structure.
How the IRS Classifies Commission
The IRS classifies commission as “supplemental wages”, which includes:
- Bonuses
- Overtime pay
- Severance pay
- Back pay
- Commissions
As a result, commissions are subject to different withholding rules than your base salary.
How Much Is Commission Taxed in the U.S.?
There are two primary methods employers can use to withhold taxes on commissions:
Aggregate Method (If Commission Is Paid with Salary)
When your commission is paid with your regular paycheck, your employer calculates tax based on your total gross pay for that pay period using standard tax brackets.
Example:
- Base pay: $3,000
- Commission: $2,000
- Total gross: $5,000→ Taxes withheld based on $5,000
Withholding includes:
- Federal income tax (based on IRS tax brackets)
- Social Security tax (6.2% up to the annual limit)
- Medicare tax (1.45%)
- State and local income taxes (if applicable)
Percentage Method (If Commission Is Paid Separately)
If your employer issues your commission on a separate paycheck, the IRS allows them to withhold at a flat rate.
Flat Tax Rates for 2025 (As per IRS guidelines):
- Federal flat rate: 22%
- Social Security: 6.2% (up to $168,600 in 2025)
- Medicare: 1.45%
- Additional Medicare Tax: 0.9% (if over $200,000 annually)
- State tax: Varies by state (0% to ~13%)
Example:
- Commission check: $1,000
- Federal tax withheld: $220
- Social Security: $62
- Medicare: $14.50
- Total tax withheld: ~$296.50
- Net pay: ~$703.50 (before state/local taxes)
Note: The flat rate only applies to supplemental wages under $1 million per year. Over that, a higher rate may apply.
Commission Tax Withholding Example
Let’s break it down:
Income TypeGross AmountFederal WithholdingSSMedicareNet (before state)Regular Pay$3,000Based on W-4$186$43.50VariesSeparate Commission$1,000$220 (22%)$62$14.50~$703.50Tip: Always review your pay stub to see how much was withheld and which method was used.
Why Does It Feel Like Commission Is Taxed More?
Although commission isn’t taxed more, it feels that way because:
- The flat 22% rate may be higher than your effective tax rate
- Commissions push you into a higher tax bracket temporarily
- Fewer deductions may be applied to supplemental checks
Example: If your effective federal tax rate is 15%, the 22% flat rate means you’re overpaying upfront—but you’ll likely get a refund when you file your tax return.
How to Reduce Taxes on Commission
- Adjust Your Withholding (W-4)Claim the correct number of dependents or additional deductions to prevent over-withholding.
- Contribute to Retirement Accounts401(k), IRA, and HSA contributions reduce taxable income.
- Track Business ExpensesIf you’re a 1099 contractor, deduct eligible work-related expenses.
- Time Your Commissions WiselyIf possible, defer commissions to a lower-income year to avoid pushing into a higher bracket.
- Use Bonuses StrategicallyPlan large commissions around deductions (like charitable contributions or mortgage interest).
Commission Tax Rules for Independent Contractors (1099)
If you’re paid on commission as a freelancer, contractor, or agent (1099), taxes are not withheld automatically. You are responsible for:
- Paying quarterly estimated taxes
- Self-employment tax (15.3% = 12.4% SS + 2.9% Medicare)
- State/local taxes
Tip: Save at least 25–30% of your commission earnings for taxes if you’re self-employed.
Commission Taxation by State (2025 Overview)
StateState Income Tax on CommissionFlorida, Texas, NevadaNo state income taxCaliforniaUp to 13.3%New YorkUp to 10.9%IllinoisFlat 4.95%PennsylvaniaFlat 3.07%Always check your state’s Department of Revenue for current rates and rules.
Conclusion
So, how much is commission taxed? In most cases, it’s either taxed based on your total income (aggregate method) or at a flat federal rate of 22% (percentage method), plus Social Security, Medicare, and any state/local taxes.
While it may seem like you’re being taxed more, the IRS balances things out when you file your return. By understanding how commission is taxed and using smart tax planning strategies, you can maximize your take-home pay and reduce surprises at tax time.
FAQs
1. Is commission taxed higher than salary?
No. It may be withheld at a higher rate temporarily, but your annual tax liability is calculated based on your total income.
2. How do I know which withholding method my employer used?
Check your pay stub: if the commission was paid separately and taxed at 22%, it likely used the percentage method.
3. Can I get a refund on overpaid taxes from commission?
Yes. When you file your annual tax return, you may receive a refund if too much was withheld from your commission checks.
4. Do I pay Social Security and Medicare on commissions?
Yes. Commissions are subject to FICA taxes just like regular wages.
5. How should I plan for taxes on a big commission check?
Speak to a tax advisor, adjust your W-4, and consider deferring income or increasing tax-deferred contributions.