Supplemental wages
Supplemental wages are payments outside an employee's regular wages: commission, bonuses, overtime, severance and similar. US payroll withholds federal income tax on them by a different method from regular pay, which is why a commission paycheck can look heavily taxed even though commission is taxed at ordinary income rates.
Every commission team has had the conversation. A rep closes a career month, sees the net figure, and concludes the company is taxing their commission at a punitive rate to discourage them. They are wrong about the tax and right about the number, and telling them they are wrong without explaining the mechanism has never once worked.
Commission is ordinary income. It is taxed at the same rates as salary and lands on the same annual return. What differs is withholding, which is an estimate payroll makes of what will eventually be owed. US federal rules give employers two routes for supplemental wages. One is a flat percentage applied to the supplemental payment when it is identified separately, available in defined circumstances. The other is the aggregate method, which combines the supplemental payment with the regular wages for that payroll period and withholds as though the total were an ordinary paycheck.
The aggregate method is where the shock comes from. Withholding tables work by annualising the period: take what the employee was paid this period, project it across the year, and withhold at the rate that income would attract. Land a large commission in a single period and the tables briefly treat the rep as though they earn several times their actual salary, and withhold accordingly. The excess is not tax. It is an overpayment that comes back at filing as a refund or reduces what is owed, having sat with the government interest-free in the meantime.
Rates, the threshold above which a higher mandatory rate applies, and the conditions for using the flat method are all set by the IRS and change. States run their own supplemental rules, and several differ from the federal treatment entirely. Social Security and Medicare apply to commission exactly as they do to salary. Commish calculates what is earned rather than what is withheld: the withholding method is your payroll provider's call, and anything approaching advice belongs with a tax professional.
Why the withholding annualises an income nobody earns
A rep on $72,000 salary is paid semi-monthly, so $3,000 a period. In March a $22,000 commission is paid in the same run as regular wages, so payroll uses the aggregate method. The rep will earn $40,000 of commission across the whole year.
- Regular pay for the period
- $3,000
- Commission in the same period
- $22,000
- Total paid in that period
- $25,000
- Pay periods in the year
- 24
- Income the tables annualise to: $25,000 × 24
- $600,000
- Income the rep will actually earn: $72,000 + $40,000
- $112,000
- Withholding calculated against, versus actual annual earnings
- $600,000 against $112,000
Nothing here is a tax rate, and none of it needs to be. The gap between $600,000 and $112,000 is the entire explanation for the March paycheck, and it settles itself when the return is filed.
Reps making decisions based on a withholding figure
Left unexplained, the over-taxed paycheck turns into behaviour. Reps ask to push a December close into January, decline to stack two commissions in one month, or argue for a smaller true-up now and a larger one later, all to dodge a tax rate that does not exist. Two lines on the commission statement fix most of it: gross commission earned, stated plainly, and a note that withholding on supplemental wages follows a payroll formula rather than a different tax rate. Anyone with a real question should be sent to a tax adviser rather than to their manager.
- Is commission taxed at a higher rate than salary?
- No. In the US, commission is ordinary income and is taxed at the same rates as salary when the annual return is filed. What differs is withholding: commission counts as a supplemental wage, and payroll withholds on it using either a flat supplemental percentage or by combining it with regular pay and annualising the period. Either method can withhold more than is ultimately owed, and the excess returns as a refund.
- What counts as supplemental wages?
- Payments made to an employee that fall outside their regular wages. Commissions, bonuses, overtime pay, severance, back pay, awards, retroactive pay increases and payouts of accumulated sick leave are all common examples. The category exists to tell payroll which withholding method to apply, and the IRS defines its scope and the applicable rates, both of which change over time.
Nearby terms
Knowing the word is
the easy half
Commish pays supplemental wages the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.