Salary vs Commission/Bonus Tax (2024)

FAQs

Salary vs Commission/Bonus Tax? ›

In general, bonuses and commissions are taxed the same way. The IRS classifies bonuses and commissions as supplemental wages and levies a flat 22% federal withholding rate for this pay.

A commission is directly tied to sales; bonus pay is not. While commission plans offer a variable income based on sales activity, bonus plans provide a set payment that reps can receive regardless of sales results (though there may still be a minimum level of sales required for the bonus).

Colorado maintains a universal income tax rate of 4.4%, applicable to all earnings, including bonuses. Bonuses, categorized as supplemental income, also incur federal taxes—22% for amounts up to $1 million and 37% for amounts above.

Specifically California labor law defines a discretionary bonus as: “sums paid as gifts at a holiday or other special occasions, such as a reward for good service, which are not measured by or dependent upon hours worked, production or efficiency, are not included for purposes of determining the regular rate of pay.”

A salary is a fixed income that an employee typically receives on a weekly, biweekly or monthly basis. A commission is extra income an employee earns when they sell goods or services.

For this reason, it's critical for employers who offer variable pay to stay up-to-date with tax regulations to remain in compliance. In general, bonuses and commissions are taxed the same way. The IRS classifies bonuses and commissions as supplemental wages and levies a flat 22% federal withholding rate for this pay.

Since bonuses are paid in addition to your normal paycheck, taxes are withheld at a higher rate than your regular wages. This is because they are considered supplemental income.

Bonuses are taxable income, but the IRS considers them supplemental wages, which means taxes may be withheld on your bonus differently than they are on your ordinary wages. Employers can either tax your bonus at a flat 22% rate or use a more complex withholding calculation.

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 is responsible for paying the withholding taxes directly to the IRS.

Why do companies give bonuses instead of salary? ›

In short, bonuses can be part of an employee's ongoing compensation package or offered as one-time events to recognize significant milestones such as growth, profitability, or longevity. By incentivizing employees during peak periods, a company can maximize its revenue and profits during a critical time of the year.

The average bonus for employees in the US is 9.6% of salary, according to reliable data from BLS and Gusto. The typical bonus amount can range from 1% to 15% of an employee's salary, usually depending on a number of factors such as industry, company performance, and individual or team accomplishments.

If you were promised a bonus for work you performed, you are entitled to receive the bonus regardless of whether you are still an employee, were fired, or quit. If your employer refuses to pay, you may have a claim for unpaid wages or breach of contract.

In general, a higher commission plan is much better for top performers due to the ability to make more per deal, and a higher. base plan is better for your middle of the pack and lower performing reps.

The drawbacks of receiving salary pay include: No overtime: Companies are not required to pay overtime to salaried employees, although some do. If you work 60 hours in a week rather than just 40 hours, you may not be eligible for overtime pay or compensated for your time.

Disadvantages of Commission-based Compensation

However, commission isn't without its drawbacks: Income Unpredictability: Earnings can fluctuate significantly, causing financial instability. Aggressive Sales Tactics: The desire to earn might push some professionals towards unethical practices.

The Bottom Line. Giving a bonus can help a company retain an employee, but offering a permanent raise really shows them you care. If done at the right time, this can be the difference between an employee staying or leaving.

The Disadvantages of Giving Bonuses

Bonuses for employees can positively and negatively affect a firm and its employees. Employees may develop false expectations from bonuses. Employees may demand bonus payments even if a small business doesn't have the funds to do so.

A reasonable commission rate depends on the base salary offered, the value of the sale, and the time required to close a deal. A range of 20%-30% is most often cited as a reasonable commission rate. The average salary-to-commission ratio in the U.S. sits at 60:40.

Those who have excelled in a compensation model that only pays sales reps commissions based on the deals they win will tell you how lucrative it can be. But with no base salary, the success of commission-only sales jobs depends entirely on pipeline strength. A spotty pipeline will equate to spotty success.