Building Your Business Business Taxes Paying and Deducting Commissions to Employees Taxes on Commissions Differ for Employees and Non-Employees By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on August 19, 2022 In This Article View All In This Article What Is a Commission? Commissions Are Taxable For Employees Deducting Commission Expenses Deductions on Your Tax Return Frequently Asked Questions (FAQs) Commission Payments and Taxes. Photo: RyanJLane/Getty Images Paying commissions to employees is sometimes difficult because there are different kinds of commissions and different ways they can be paid. Here is what you need to know about paying commissions, deducting them as a business expense, and recording them for employment tax purposes. Key Takeaways Commissions is payment to a worker once a task is completeBusiness owners may deduct commissions paid as business expensesCommissions to employees are considered supplemental wages and are taxableEmployers must withhold taxes on employee commissionsYou're not required to withhold taxes for non-employee commissions except when they're subject to backup withholdingWhere and how you report commission payments on tax returns depends on your business structure and whether the worker is an employee or not What Is a Commission? The U.S. Department of Labor defines a sales commission as a sum of money paid to an employee when a task is completed, usually selling a certain amount of goods and services. Commissions can also be paid as incentives to increase worker productivity. Some examples of commissions: Sales Employee: May receive a sales commission, usually in addition to base pay, for meeting or exceeding a specific sales target in a specific period of time. This commission may be a percentage of sales or a percentage of a base amount of sales.Insurance Agent: Typically, an independent agent or non-employee agent makes a commission on the sale of an insurance policy. The amount of commission varies based on the type and amount of the policy. Real Estate Agents: Receive commissions on the sale of a property. Typically, these agents are not employees of a company. Note Commissions are always taxable income to the person receiving them, both employees and non-employees. Commissions are a cost of doing business, so if they are "ordinary and necessary" expenses they are usually deductible to your business. Commissions Are Taxable For Employees Commissions paid to employees are considered supplemental wages because they can be included in the employee's regular paycheck or paid separately. They may be paid as a percentage of total sales or in excess of a specific amount, or some other method. Commissions are considered taxable, that means federal and state income taxes and FICA taxes must be withheld from commission checks, and you as the employer must pay part of these taxes. Note Withholding taxes on supplemental wages must be done in specific ways, depending on whether the payment is part of the employee's regular paycheck or is a separate payment. Commissions for Overtime and Retail Employees If you are paying commissions to retail employees, you may be able to elect an exemption from paying overtime to these employees. To get this exemption: The employee must be employed at a retail or service business The employee's regular pay rate must be greater than one and one-half the minimum wage for every hour worked in a workweek in which overtime hours are worked More than half the employee's total earnings in a period must be from commissions If all three conditions aren't met, you must pay overtime premium pay (at least one and one-half the employee's regular pay rate) for all hours worked over 40 in a workweek. How to Report Commissions for Tax Purposes How you report commissions you depends if they were paid to an employee or a non-employee: Reporting Employee Commissions Commissions to employees are reported on the employee's W-2 form in Box 1: Wages, tips, other compensation. You must file a copy of the W-2 with the Social Security Administration and give a copy to the employee to do their taxes. You must also include commissions as employee income on Form 941, your quarterly payroll tax report, and make periodic payments of these taxes to the IRS. Reporting Non-Employee Commissions Commissions paid to non-employees (agents and independent contractors, for example) are paid directly to the worker. Because this person is not an employee, no income tax or FICA tax is withheld. These workers are considered self-employed and the payments you give them are subject to self-employment taxes on these payments. Note If a non-employee is subject to backup withholding, you must include commission payments to that person when you are calculating the backup withholding amount. You must report commission payments to non-employees on IRS Form 1099-NEC (beginning in 2020), and you must give a copy of this form to both the payee and the IRS. Deducting Commissions Payments You (as a business owner) may deduct commissions and fees paid to employees and independent contractors for their services. Several types of commissions can't be deducted in the year when you have the expense. These expenses are considered capital expenses and they must be amortized (spread out over 15 years): Commissions, bonuses, or fees to get a lease on business propertyCommissions for getting a mortgage on a business buildingCommissions for issuing and selling stock or securities Where to Show Deductions on Your Business Tax Return If you have paid commissions to others, you can deduct these expenses in specific places on your business tax return. The place where you enter the deduction depends on your business type: For sole proprietors and single-member LLCs, commissions and fees are totaled on the "Expenses" section of Schedule CFor partnerships and multiple-member LLCs, commissions and fees are totaled in the "Deductions" section of Form 1065For corporations, commissions and fees are totaled on the "Deductions" section of Form 1120 Frequently Asked Questions (FAQs) When do commission payments transition from supplemental wages to non-employee compensation? According to the IRS, supplemental wages are wages paid to an employee that are not a part of their regular wages. Commissions are a form of supplemental wages. Supplemental wages also include bonuses, overtime pay, and severance pay among others. Non-employee commission is paid out to workers that are not employees. Do you have to withhold tax on sales commission for a non-employee? Commissions paid to non-employees (agents and independent contractors, for example) are paid directly to the worker. Because this person is not an employee, no income tax or FICA tax is withheld. These workers are considered self-employed and the payments you give them are subject to self-employment taxes on these payments. However, you may need to withhold some amount if the non-employee is subject to backup withholding. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. Department of Labor. "Commissions." Internal Revenue Service. "Publication 535 (2021), Business Expenses - Tests to Deduct Pay." Internal Revenue Service. "Publication 15 (Circular E), Employer's Tax Guide-Supplemental Wages." U. S. Department of Labor. "Fact Sheet #20: Employees Paid Commissions by Retail Establishments Who are Exempt Under Section 7(i) from Overtime under the FLSA." Internal Revenue Service. "General Instructions for Forms W-2 and W-3 (2022)." Internal Revenue Service. "About Form 941, Employer's Quarterly Federal Tax Return." Internal Revenue Service. "Instructions for Forms 1099-MISC and 1099-NEC - Additional Material." Internal Revenue Service. "Publication 535 (2021), Business Expenses -Cost of Getting A Lease." Internal Revenue Service. "Publication 535 (2021), Business Expenses - Expenses paid to obtain a mortgage." Internal Revenue Service. "Publication 535 (2021), Business Expenses - Costs of Organizing a Corporation." Internal Revenue Service. "2021 Instructions for Schedule C (2021) - Part II. Expenses Line 10." Internal Revenue Service. "Instructions for Form 1065 (2021) - Deductions - Line 9. Salaries and Wages." Internal Revenue Service. "Instructions for Form 1120 (2021)- Deductions Line 13. Salaries and Wages."