How Taxes Are Withheld With Commission Checks
The Commission Tax Problem
You close a big deal. Your commission check hits your account. It's $50,000. You're excited.
Then you look at your pay stub. Your employer withheld $15,000 in taxes. Your take-home is $35,000.
You're confused. Why did they withhold so much? Is this normal? Will you get it back at tax time?
Here's how taxes work with commission checks — and how to avoid surprises.
How Commission Checks Are Taxed
Commission checks are taxed as supplemental income, which means they're subject to different withholding rules than your regular salary.
Federal withholding: Commission checks are typically withheld at a flat rate of 22% for federal taxes, regardless of your tax bracket. If your commission is over $1 million, the rate jumps to 37% for the amount over $1 million.
State withholding: State withholding varies by state. Some states withhold at a flat rate, others use your regular withholding rate. Check your state's rules.
FICA taxes: Commission checks are subject to FICA taxes (Social Security and Medicare), just like your regular salary. The Social Security tax is 6.2% on income up to $168,600 (for 2024), and Medicare is 1.45% on all income. High earners pay an additional 0.9% Medicare tax on income over $200,000.
Total withholding: With federal (22%), FICA (7.65%), and state taxes, you might see 30-40% of your commission check withheld for taxes.
Why Withholding Might Not Be Enough
Here's the problem: the 22% federal withholding rate might not be enough if you're in a higher tax bracket.
If you're in the 24%, 32%, or 37% tax bracket, 22% withholding isn't enough. You'll owe additional taxes at tax time. This is why many sales professionals get surprised with large tax bills.
State taxes add to the burden. If you're in a high-tax state like California or New York, state taxes can add 5-13% to your tax burden.
You might owe quarterly estimated taxes. If your commission checks are large and irregular, you might need to pay quarterly estimated taxes to avoid penalties.
How to Calculate What You'll Actually Owe
Here's how to estimate what you'll actually owe:
Federal taxes: Look up your tax bracket. If you're in the 24% bracket, you'll owe 24% on commission income, not 22%. The difference between what was withheld and what you owe will be due at tax time.
State taxes: Check your state's tax rates. High-tax states can add 5-13% to your tax burden.
FICA taxes: These are already withheld, so you don't need to worry about them at tax time.
Total tax rate: Add federal, state, and FICA. For someone in a 24% federal bracket in a 5% state tax state, the total is roughly 36.65% (24% + 5% + 7.65%).
Example: If you receive a $50,000 commission check:
- Withheld: $11,000 (22% federal) + $3,825 (FICA) + $2,500 (5% state) = $17,325
- Actual tax owed: $12,000 (24% federal) + $3,825 (FICA) + $2,500 (5% state) = $18,325
- You'll owe an additional $1,000 at tax time
How to Avoid Tax Surprises
Here's how to avoid surprises at tax time:
Set aside additional money for taxes. If you're in a higher tax bracket, set aside the difference between what was withheld (22%) and what you'll actually owe (your tax bracket rate). Keep this in a separate savings account.
Adjust your W-4. You can ask your employer to withhold additional taxes from your regular paycheck to cover the shortfall from commission checks. This spreads the tax burden across the year.
Pay quarterly estimated taxes. If you're receiving large commission checks regularly, you might need to pay quarterly estimated taxes. This prevents penalties and spreads the tax burden.
Work with a tax professional. A tax professional can help you understand your specific situation and create a tax strategy that minimizes surprises.
The W-4 and Commission Checks
Your W-4 determines how much is withheld from your regular paycheck, but it doesn't directly affect commission check withholding.
Commission checks use flat-rate withholding (22% federal), regardless of your W-4. Your W-4 only affects your regular salary withholding.
You can adjust your W-4 to compensate. If commission checks aren't withholding enough, you can increase withholding on your regular paycheck to make up the difference.
Example: If you're in the 24% bracket and commission checks are only withholding 22%, you can increase your regular paycheck withholding to cover the 2% difference.
State Tax Considerations
State tax withholding varies by state:
Flat-rate states: Some states withhold commission checks at a flat rate, similar to federal withholding.
Regular withholding rate states: Other states use your regular withholding rate for commission checks.
No state income tax: If you're in a state with no income tax (like Texas or Florida), you only need to worry about federal and FICA taxes.
Check your state's rules. Each state has different rules, so check with your employer or a tax professional to understand your specific situation.
FICA Taxes on Commission
FICA taxes (Social Security and Medicare) are withheld from commission checks just like regular salary:
Social Security: 6.2% on income up to $168,600 (for 2024). Once you hit the cap, you stop paying Social Security tax for the year.
Medicare: 1.45% on all income, with no cap.
Additional Medicare tax: High earners (over $200,000) pay an additional 0.9% Medicare tax.
These are already withheld. You don't need to worry about FICA taxes at tax time because they're already withheld from your paycheck.
What Happens at Tax Time
When you file your taxes, here's what happens:
You'll receive a W-2 showing all income and withholding. This includes your base salary and commission checks, along with all taxes withheld.
You'll calculate your actual tax liability. This is based on your total income, deductions, and credits.
You'll compare what was withheld to what you owe. If more was withheld than you owe, you'll get a refund. If less was withheld, you'll owe additional taxes.
You might owe penalties. If you under-withheld significantly, you might owe penalties. This is why it's important to set aside additional money or adjust your withholding.
Strategies for Managing Commission Tax Withholding
Here are strategies for managing commission tax withholding:
Set aside 30-40% of commission checks. This covers federal, state, and FICA taxes, plus a buffer for higher tax brackets.
Adjust your W-4. Increase withholding on your regular paycheck to compensate for under-withholding on commission checks.
Pay quarterly estimated taxes. If you're receiving large commission checks regularly, pay quarterly estimated taxes to avoid penalties.
Work with a tax professional. A tax professional can help you create a tax strategy that minimizes surprises and maximizes your take-home pay.
Keep detailed records. Track all commission checks, withholding, and tax payments. This makes tax time easier and helps you plan for the future.
The Bottom Line
Commission checks are taxed differently than regular salary. They're withheld at a flat 22% federal rate, which might not be enough if you're in a higher tax bracket.
Set aside 30-40% of commission checks for taxes. This covers federal, state, and FICA taxes, plus a buffer for higher tax brackets.
Adjust your W-4 or pay quarterly estimated taxes to avoid surprises at tax time.
Work with a tax professional to understand your specific situation and create a tax strategy.
The goal is to avoid surprises at tax time. By understanding how commission checks are taxed and planning accordingly, you can minimize surprises and maximize your take-home pay.
Disclaimer: This content is for informational purposes only and does not constitute financial, tax, or legal advice. Tax laws and rates vary by jurisdiction and individual circumstances. You should consult with a qualified tax professional or CPA before making any tax-related decisions. Individual tax situations vary, and this information may not be suitable for your specific situation.