How commission pay is taxed in 2026
The IRS classifies commission payments as supplemental wages — a category that also includes bonuses, overtime premiums, and severance pay. Under IRS Publication 15, employers withhold federal income tax on supplemental wages at a flat 22% rate for amounts up to $1 million in a calendar year (37% above that threshold). This rate applies regardless of the employee's regular income tax bracket, which means high earners may owe more at filing time while lower earners may receive a refund. Commission income also triggers FICA withholding: Social Security at 6.2% (up to the 2025 wage base of $176,100) and Medicare at 1.45% on all wages. State supplemental rates vary — use the state dropdown above for your state's effective rate. For W-2 employees, use our payroll tax calculator to model commission as part of your full annual withholding picture.
Tiered vs flat commission structures. A flat commission pays a single fixed percentage on all sales — simple to calculate and easy to communicate. Tiered commissions apply different rates to incremental sales ranges, similar to how income tax brackets work. The first $10,000 might pay 5%, the next $15,000 might pay 8%, and anything above $25,000 might pay 12%. Each portion of your sales is taxed at only that tier's rate — not your highest achieved rate applied to everything. Tiered structures reward high performers and are common in B2B sales roles. Our Tiered mode above lets you add up to 8 custom tiers and shows the commission earned in each bracket separately so there's no guesswork about how the math works. Bonuses and commissions share the same 22% withholding rule — see the bonus tax calculator for comparison.
Draw against commission: recoverable vs non-recoverable. A draw is a guaranteed advance paid to a commissioned employee during low-sales periods. At settlement time, the draw is compared against earned commissions. With a recoverable draw, any shortfall (draw paid minus commission earned) is carried forward as a debt against future commissions — the employee eventually repays it through future earnings. With a non-recoverable draw, the employer forgives shortfalls; the employee keeps the draw regardless of commission performance. Non-recoverable draws function as a guaranteed minimum pay floor with commission upside. Tax-wise, all commission income — including the gross amount before draw recovery — is subject to the 22% supplemental withholding. The draw recovery is a separate compensation accounting item, not a separate taxable event.
W-2 vs 1099 commission workers. The 22% supplemental rate applies only to W-2 employees whose employers are required to withhold payroll taxes. Independent contractors paid on a 1099 basis receive commissions in full with no withholding — but they owe self-employment tax (15.3% covering both the employee and employer share of FICA) in addition to ordinary income tax at their marginal bracket rate. 1099 contractors must also make quarterly estimated tax payments to avoid underpayment penalties. The after-tax difference between W-2 and 1099 commission structures can be significant. Use the 1099 vs W-2 calculator to compare the true take-home under each arrangement, including the self-employment tax burden for contractors.