Most individuals who have jobs receive a salary from an employer as well as benefits, such as healthcare and ret൩irement accounts (e.g., 401(k) plans). However, some companies, for instance, those in the financial services sector, employ people who work on commission.

Working on commission means that people are paid based on their performance. In this case, an employee might receive a very small salaඣry whi🃏le the bulk of their income would come from commissions generated from the amount of business they generate for the firm.

The question arises, who is responsible for withhol🎃di♓ng taxes from commissions?

Understanding Commissions and Tax Withholding

A commission is an aജmount of money that represents a percentage of the sales value an employee generates for their company.

Compensation by commission is not ideal for everyone. Those who are paid in this manner generally have to be extremely proactive in both procuring new business and nurturing existing business. They must meet sales targets to make enou💦gh money to support themselves.

In a standard salaried job, tax withholding is the responsibility of the employer. This is not always the case for someone working on commission. That's because they may be an employee of the company or they may be an independent contractor who, despite working on behalf of the company, is not employed by it.

The 澳洲幸运5官方开奖结果体彩网:income tax withholding responsibility for someone who earns their living through commissions is different depending on their employment status. In addition, the way in which the commissions are classified also plays a rolꦜe in how taxes are calculated.

Reporting and Paying Taxes on Commissions

For Employees

An individual who receives commissions can be treated in the same manner as one who receives a straight salary. That is, they can be an employee of the company. In this case, the employer would 澳洲幸运5官方开奖结果体彩网:withhold taxes from the individual's compensation and rem൲it the withheld amount to the t🐈ax authorities on the individual's behalf.

The withholding would be based on the elections the employee makes on Form W-4 and reported on Form W-2 at the end of the year by the employer.

For Independent Contractors

Alternatively, the individual can be a self-employed 澳洲幸运5官方开奖结果体彩网:independent contractor, or someone with whom a company contracts to provide services or perform work. This person is nꩲot employed by the company.

In this case, the individual and not the company would be responsible for remitting the taxes to the federal and state tax authorities. In fact, normally they are required by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) to pay taxes quarterly since no one is withholding taxes for them. For this, they should use Form 1040-ES: Estimated Tax for Individuals.

These estimated taxes cover income taxes, Social Security taxes, and Medicare taxes.

Also, independent contractors would file their annual tax return using the information contained on 澳洲幸运5官方开奖结果体⭕彩网:Form 1099-NEC: Nonemployee Compensation, which is provided to them by the compan⭕y (or companies) that paid them commissions.

The IRS's Publication 505 provides details on tax withholding and estimated taxes.

Self-Employment Tax

FICA taxes for Medicare and Social Security are accounted for when the independent contractor files 澳洲幸运5官方开奖结果体彩网:self-employment tax. The self-employment tax rate is 15.3% for 2024, with 12.4% for Social Security and 2.9% for Medicare.

Calculating Taxes on Commissions

Taxes on com♊missions are calculated in different ways, depending on the filing status of the individual w🎶ho receives them.

If the individual is an employee and commissions paid are included in regular wages, the employer will calculate and withhold the taxes according to the employee's W-4 information and the tax withholding table in IRS Publication 15-T, Federal Income Tax Withholding Methods.

If the commission is paid separately as a supplemental wage, then an employer has two ways💫 to determine the taxes withheld: the percentage method or the aggregate method.

Percentage vs. Aggregate Calculation

The percentage method is a flat 22%. However, if the commission is more than $1 million, the percentage is 37% for withholding in 2024.

The aggregate method involves adding the commission wages and the regular wages, classifying the total amount as regular wages, and withholding taxes using 澳洲幸运5官方开奖结果体彩网:ordinary income tax rates.

The Bottom Line

A commission is a type of wage and all wages are taxable. If an individual is considered to be an employee and their commission is either included in their salary or is supplemental to their salary, the employer is𝓀 responsible for paying the w𒆙ithholding taxes directly to the IRS.

If an employee is self-employed, and therefore an independent🌟 contractor, then the individual is responsible for paying the taxes directly.