Commission refers to additional compensation received by an employee after completing a task or tasks. Usually, a commission is gained after reaching a specific goal, like selling a certain number of products or services, either individually or over time. Commissions are also common for recruiters, who can get commissions based on placing a certain number of individuals.
However, many times people are confused about what is a commission vs. a bonus.
Commission vs. Bonus
When comparing the concepts of commission vs. bonus, you should note that a bonus is many times a fixed amount that is awarded after a specific condition is met, as opposed to being awarded by the completion of actions.
In a commission pay structure, employees are rewarded for successful actions, e.g. $5 per unit sold. In contrast, a bonus is not typically part of an employee’s regular pay schedule, but a reward for meeting an objective, e.g. a $200 bonus after 2000 units are sold in a month.
Do Commissions Get Taxed?
Commissions are taxed. They are usually lumped together with your regular salary and taxed according to your tax bracket, while bonuses are not. Bonuses under $1 million are typically subject to a 22% flat rate, with the portion over $1 million being taxed at 37%. Employers have a choice of withholding your taxes based on a percentage or aggregate rate. Withholding at a percentage rate is more common since it is both easier to understand and to implement.
Regardless of what method they use or whether your commission is lumped together with your salary, your employer will probably still withhold funds for Social Security and Medicare.
If you are still wondering about commissions vs. bonuses and how your taxes are affected by them, contact us today. Our tax services are designed to help you understand your tax burden as well as overcome it.