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 taxes. What would have been a $5,000 commission check is cut in half. You might ask yourself why is my commission check taxed so much? 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. Now is 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.