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. 

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.

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. 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