why is my commission check taxed so much
Tax Policy

Why is My Commission Check Taxed so Much?

If you earn commission it might be beneficial to review your tax withholding amounts.

Does this sound familiar: It’s the end of the month and you killed it with your sales goal. You’re expecting a large commission check but you’re horrified to see how much money is being withheld in tax. What would have been a $5,000 commission check is cut in half. “Why is my commission check taxed so much?”, you might ask yourself. Well this article will breakdown exactly why your commission check is taxed so much and looks so sad post tax.

Supplemental vs. Regular Wages

The main distinction between commission/bonus checks vs. regular wages is the way your employer withholds taxes. If your commission is being paid out as part of your weekly/bi-weekly salary then it is considered regular wages.

However, if you are like most sales reps and your commission is paid monthly/quarterly/annually then you will pay taxes at a supplement rate. IRS guidelines require employers to withhold tax at a 25% rate on top of withholdings for social security and medicare taxes.

Add on state and local taxes and your commission check could be cut in half! But does this mean commissions are actually taxed at a higher rate? Well not exactly.

Withholding vs. Tax Liability

There is a clear distinction between what is withheld from your paycheck and what you actually owe in taxes at the end of the year. The IRS requires employers to withhold and remit taxes from employees’ wages so they don’t owe a ton of money at the end of the year.

If your effective tax rate (federal income tax divided by taxable income) is less than 25%, as is the case for most Americans, then chances are you’re having too much withheld from your paycheck. (If you received a huge tax refund then odds are this is the case.)

Even Out Your Taxes

If your income is generated from commission and base pay then it might be a good idea to adjust your tax withholdings. If you find you’re receiving big tax refunds in April then you can have less tax withheld from your base salary.

By adjusting your withholding you can take home more of your hard-earned money and not wait for the end of the year to fully enjoy your commission checks.

Consult With a Tax Advisor

Before changing your withholdings you might want to discuss with a tax advisor. With the new tax changes and the lowering of tax rates taking effect in 2018 it’s more beneficial than ever for commission based workers to craft a more strategic tax plan during the year.

For more information on tax policy, check out these articles.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Photo Copyright: <a href='https://www.123rf.com/profile_samuraitop'>samuraitop / 123RF Stock Photo

2 comments on “Why is My Commission Check Taxed so Much?

  1. What is the best way to plan so I come out even at the end of year. I have a real estate business as well as sales W-2 job, base plus commission.

    • Jeremias Ramos, CPA

      If you have a real estate business as well as a W-2 job then you generally have 2 options. First you’ll need to run a calculation of what your projected tax will be based on your projected earnings from your job and net profit from your real estate business. Once you do that then you can either adjust your withholdings from your w-2 to cover the real estate business or you can pay quarterly estimates based on the real estate income. If you use a tax professional to prepare your return they should be able to run some projections for you to break even at the end of the year.

      If you have additional questions feel free to contact thedailycpa@gmail.com

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