Are bonuses and commissions taxed the same?
In the United States, for instance, both bonuses and commissions are considered taxable income, which means that employees have to pay income tax on the amount they receive in the form of a bonus or commission.
In general, bonuses and commissions are taxed the same way. The IRS classifies bonuses and commissions as supplemental wages and levies a flat 22% federal withholding rate for this pay.
Sales representatives may earn bonuses that vary depending on individual or team performance. Bonuses also might be represented by a percentage or flat amount. By contrast, commission pay is rewarded to salespeople based on the number of sales they make. A commission is directly tied to sales; bonus pay is not.
The federal bonus tax withholding rate is typically 22%. However, employers could instead combine a bonus with your regular wages as though it's one of your usual paychecks—with your usual tax amount withheld. There are ways to reduce the tax impact of your bonus.
With the percentage method, employers hold a 22% tax rate on commissions below $1 million. If the commission is above $1 million, the tax rate increases from 22% to 37%. These rates exist so that employees' earnings can still be taxed without reducing the income value too much. So, how much is commission taxed?
By now, you may be wondering, “Why are bonuses taxed so high?” It's because the IRS considers bonus pay to be supplemental income. Therefore, the IRS treats it differently than your standard income. The purpose is to help you save some money back on taxes now, so you don't face a large tax bill at the end of the year.
Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely.
The industry average for sales commission typically falls between 20% and 30% of gross margins. At the low end, sales professionals may earn 5% of a sale, while straight commission structures allow a 100% commission.
- Straight Commission. Formula: Earnings = Sale x Commission Rate.
- Base Pay + Commission. Formula: Earnings = Base Pay + (Sale x Commission Rate)
- Bonus Commission. Formula: Earnings = Gross Sale x Commission Rate.
- Tiered Commission. Formula: ...
- Gross Margin Commission. Formula:
Depending on if you receive a separate or combined paycheck for your bonus will determine how your bonus is taxed. If you receive a separate paycheck, you will have an automatic, flat 22% withheld on your bonus (if your bonus is over $1MM this increases to a flat 37%).
How do I avoid paying 40% tax on my bonus?
- Make a Retirement Contribution. ...
- Contribute to a Health Savings Account (HSA) ...
- Defer Compensation. ...
- Donate to Charity. ...
- Pay Medical Expenses. ...
- Request a Non-Financial Bonus. ...
- Supplemental Pay vs.
The percentage method
The withholding rate for supplemental wages is 22 percent. That rate will be applied to any supplemental wages like bonuses up to $1 million during the tax year. If your bonus totals more than $1 million, the withholding rate for any amount above $1 million increases to 37 percent.
“If they just raise our salary, we're not going to be taxed so heavily on that. Plus there's no guarantee year-to-year what they're going to do,” she said. Bonuses can be taxed at a higher rate than normal wages, though there are some ways to mitigate that, and you might wind up getting a refund.
For tax purposes, both bonuses and commissions are considered supplemental wages and follow the same tax withholding rules. If you pay your employee a regular wage—whether salary or hourly—you can include their bonus and commission earnings in their total wages, calculating taxes as if it were all regular wages.
Your commission is combined with your regular wages as if it was a single payment. Your employer will then use your wages to calculate the entire number of withholdings from the total amount. For example, if your salary is taxed at a 35% withholding rate, then your commission would be taxed at that same 35%.
Assuming they are a W-2 employee, they must be paid a minimum wage. If their commission will exceed the minimum wage, you don't have anything to worry about. If they're commissions will not exceed the minimum wage You're going to have some issues. The way most companies get around this is to pay a draw commission.
While there are a couple different methods for determining how much tax to withhold from commission payments, commission pay is still subject to the same taxes as regular earnings.
| Tax Rate | Single filers | Married filing jointly or qualifying surviving spouse |
|---|---|---|
| 24% | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 |
| 37% | $578,126 or more | $693,751 or more |
1. Review your W-4. Because bonuses can occur at any point during the year, they get added to your salary piecemeal. And that can inflate your earnings or even push a portion of your income into a new tax bracket, increasing your tax liability.
There's no legal way to pay employees bonuses without taxes. You have three options for taxing and processing bonus payments: Run separate bonus payroll (“the percentage method”). Include the bonus in your regular payroll run and denote it (“the aggregate method”).
Can I defer 100% of my salary to a 401k?
You can't defer more than $10,000 to either plan (for example, $12,000 to the 401(k) plan and $8,000 to the SIMPLE IRA plan) because your deferrals to each employer's plan can't exceed 100% of your compensation from that employer.
The "safe harbor" regulations describe various payment and business practices that, although they potentially implicate the Federal anti-kickback statute, are not treated as offenses under the statute.
Challenges of commission-only sales jobs
This can cause stress. Another challenge is high turnover. Since you're either making money, or you're not, the revolving door of reps leaving seems to never end. Plus, banks often flag 100% commission jobs as “high-risk” on house loans or refinancing applications.
A commission is extra income an employee earns when they sell goods or services. The standard salary to commission ratio for sales companies is 60-40, where 60% is an employee's base salary or hourly wage and 40% is their commission-based pay.
What Is OTE? OTE stands for on-target earnings or on-track earnings. It's the maximum annual salary that an employee can earn when sales and commission are a part of their compensation. An employee may not earn their whole OTE if they don't meet their sales quota.
