Overview: Commissions paid to employees are generally subject to federal income tax (FIT) and Social Security and Medicare (FICA) tax withholding and federal unemployment (FUTA) tax when paid. Commissions are treated as supplemental wages for purposes of FIT withholding.
Employers must carefully keep track of employees' supplemental wages because different income tax withholding rules apply depending on the total amount employees receive in a year, i.e., $1 million or less or over $1 million. Employers should also check the law of the states in which they pay employees. Many states allow flat rate withholding from supplemental wages at rates that vary widely, while other states require supplemental wages to be aggregated. A handful of states do not provide a supplemental tax rate at all.
Employers must also be aware of types of commissions that are taxed differently than the general rule stated above. For example, commissions paid to certain insurance agents are not wages subject to FIT withholding, and certain insurance agents are not considered employees for FUTA tax purposes. In addition, special income and employment tax rules apply to employers that act as paying agents for third parties and to commissions paid directly by a third party (e.g., a manufacturer) to another employer's salespersons.
Rena Pirsos, JD, Legal Editor
Attracting, motivating and retaining talent is critical to an employer's short- and long- term success. This section assists HR professionals in implementing a comprehensive, integrated total rewards strategy that can help achieve those important objectives.
HR guidance on the tax and reporting rules regarding commissions.