Paying and Deducting Commissions to Employees

Commissions to Independent Contractors and Employees

Paying and Deducting Commission Payments
Paying and Deducting Commission Payments. Ariel Skelley/Getty Images

What is a Commission? 

A commission is an payment made to an employee, independent contractor, or agent, based on performance. Some examples of commissions: 

  • A 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 over a base amount of sales. For example ???
  • An 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 also receive commissions on the sale of property. Typically these agents are not employees of a company. 

 

How are Commissions Paid? Are Commissions Taxable?

Commissions to Employees. Commissions are usually paid to employees in their paycheck or a separate paycheck, at the time and method specified by the employer. Commissions are considered part of the regular pay for an employee and they are taxable. That means federal and state income taxes and FICA taxes must be withheld from commission checks. 

Commissions to Non-employees. 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. 

How are Commissions Reported for Tax Purposes? 

Commissions to employees are reported on the employee's W-2 form, in Box 1: Wages, tips, other compensation. 

Commissions to non-employees are reported on the 1099-MISC forms in Box 7, Non-employee Compensation.

 

Can I Deduct Commissions I Pay to Others? 

You may deduct commissions and fees paid to employees and independent contractors for their services. For example, if you paid a broker a commission to help you buy a business, this commission is deductible as a business expense. Or if you paid a finder's fee to someone for finding you a business to buy, you may also deduct this amount. 

Box 7 of the 1099-MISCis not used for tips for employees.   

Where to Show These Expenses on Your Business Tax Return

  • For sole proprietors and single-member LLCs, commissions and fees are totaled on the "Expenses" section of Schedule C
  • For partnerships and multiple-member LLCs, commissions and fees are totaled in the "Deductions" section of Form 1065
  • For corporations, commissions and fees are totaled on the "Deductions" section of Form 1120.

For More Information on Paying Commissions, the Department of Labor's Wage and Hour Commission has a Fact Sheet on Commissions. 

Disclaimer
This article presents general information for the purpose ; I am not a tax attorney or tax preparation specialist. Refer to IRS publications and refer questions to your tax consultant.