How commissions and bonuses are taxed and withheld

If you're paid on commission, some months look like a normal paycheck and others bring a check several times bigger. Your tax bill doesn't care how the money arrived. What changes is how much your employer withholds along the way, and that's where the surprises come from.

Commissions are taxed like salary

The IRS calls commissions and bonuses supplemental wages. There's no special "bonus tax rate." At year end, every dollar of commission is added to your salary and taxed at your normal brackets, plus Social Security and Medicare.

The only thing that's different is the withholding: the estimate taken out of each check before you see it. Withholding is a prepayment, not your final tax.

Two ways your employer can withhold

1. The flat rate (percentage method)

If the commission is paid separately from your regular pay, or listed separately on your pay stub, your employer can withhold a flat 22% for federal, no matter your bracket. Once your supplemental pay for the year passes $1 million, the part above $1 million must be withheld at 37%.

2. The aggregate method

If the commission is paid together with your regular pay, your employer may add it to that paycheck and withhold as if you earned that combined amount every pay period all year.

Why big commission checks seem withheld higher

You're not imagining it. Under the aggregate method, a large check really is withheld at a higher rate.

Say your base pay is $12,000 a month and you get a $30,000 commission in the same paycheck. Payroll treats that $42,000 month as if you'll earn $42,000 every month, or $504,000 a year. That puts the withholding in the 35% bracket, even though your real income for the year may be far lower. The bigger the check, the higher the bracket payroll assumes.

That's why a huge check can feel over-taxed. Often it is over-withheld, and you get part of it back as a refund.

Why you can still owe in April

The opposite happens under the flat rate. If you're in the 32% or 35% bracket, 22% withholding on a $30,000 commission takes about $6,600 when the real federal tax is closer to $9,600 to $10,500. Do that several times a year and the gap adds up.

So big commissions can leave you short or over-withheld. It depends on which method your employer uses and on your real bracket for the whole year.

How to tell which method you got

Look at the pay stub for the commission check:

• If federal withholding on the commission is exactly 22%, your employer used the flat rate.
• If the percentage is noticeably higher and varies with the size of the check, it's the aggregate method.

When in doubt, ask your payroll team.

State withholding works the same way

Many states have their own flat supplemental rate, and some use the aggregate method. The same over- and under-withholding can happen on your state return.

Big months change your whole year

One large commission can push your yearly income into a higher bracket. That means the withholding on your base pay from earlier in the year may also have been too low for your real rate.

Timing matters too. The IRS expects tax to be paid through the year. A big commission in the fall doesn't cover a shortfall from the spring, so you can owe an underpayment penalty even if you catch up by December. See our guide on too little tax withheld.

What to do

• Update your year-to-date withholding after each big month. Your pay stub shows what was actually withheld, whichever method was used.
• Make an estimated payment after a big check if you're coming up short.
• Adjust your W-4 to have a set extra amount withheld from each regular paycheck.
• Don't count on a refund. Over-withholding on one big check can be wiped out by flat 22% withholding on others.

If you find a gap, the simplest fix is extra withholding per paycheck. See how to use W-4 Step 4(c).

How to model it in the calculator

1. Enter your total expected pay for the year, base plus commissions, as your salary.
2. Under paycheck withholding, choose Year-to-date amount and enter the year-to-date federal and state tax from your latest pay stub.
3. Update it after every big commission month. The balance shows whether you're on track, short, or due a refund.

Try it: open the calculator with a sample commission year: $12,000 a month in base pay plus one $30,000 commission.