The method you use to file your taxes is largely reflective of your employment status. If you earn commission, you file your taxes either as an employee or a self-employed person. If you receive a W-2, your employer likely withholds Social Security, Medicare and federal income taxes. However, if you receive a 1099-MISC, you're considered self-employed by the federal government. This means you'll need to pay your own Social Security, Medicare and estimated federal income taxes. You can use Form 1040-ES to file any estimated taxes.
Information provided on your 1099-MISC and W-2 can help you understand how much commission you should be reporting on your tax return. If you are self-employed and also earning commission, you may need to file estimated taxes in order to ensure that you avoid federal penalties or unwelcome tax surprises at year end.
Commission Pay Definition
Employers or clients pay you commissions when you carry out certain services, including selling a product or service. Typically commissions are paid as a percentage of a sale or a fixed fee per sale. Some employees get paid entirely based on commissions, while others may have a salary, but also earn bonus commission. If you’re considered an employee, your employer should withhold the taxes from your pay. Employers withhold 6.2 percent for Social Security taxes and 1.45 percent for Medicare taxes, as well as your federal and state income taxes, from your paychecks.
Filling Out Your W-4
When you start to work, your employer should provide you a W-4 to fill out. The W-4 helps your employer determine the amount of federal income tax to withhold from your earnings. The W-4 also contains a personal allowances worksheet that assists you in identifying the allowances you can claim. The more allowances you take, the lower your withholdings will be on each check, but if you take too many allowances you run the risk of having a tax bill at the end of the year or getting penalized for withholding too little.
Earning Non-Employee Compensation
If you get a 1099-MISC, you're considered an independent contractor. This means you provide specific services to the client, like selling products, but aren't actively managed or controlled by the client like an employee. The Internal Revenue Service considers independent contractors to be self-employed, and you'll have to take care of your own Social Security and Medicare taxes by paying a self-employment tax. You'll also have to withhold your own federal income taxes and possibly pay quarterly estimated tax payments.
Filing Estimated Taxes
The IRS expects you to file quarterly estimated taxes if you anticipate owing more than $1,000 on your annual return and you're classified as a sole proprietor, a partnership, or S corporation shareholder. If you get paid a commission check as an independent sales representative, you're likely a sole proprietor, or owner, unless you've legally set up a business partnership or S corporation. To figure out your estimated taxes, you'll need to forecast your estimated adjusted gross income and taxable income for the year, figuring in deductions, credits and taxes.
The IRS has set up four due dates for the payment of estimated taxes. These occur in April, June, September and January of the next year. The easiest way to pay is through the IRS's Electronic Federal Tax Payment System (EFTPS). The system also documents your payments so you can keep up with them. Generally, the IRS penalizes you if you fail to pay or underpay the taxes and you owe more than $1,000 in taxes on your year-end return.
- IRS: Form 1040-ES
- IRS: Estimated Taxes
- IRS: Tax Withholding
- Internal Revenue Service. "Estimated Taxes." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Publication 505 (2020), Tax Withholding and Estimated Tax: When to Pay Estimated Tax." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Publication 505 (2020), Tax Withholding and Estimated Tax: What's New for 2020." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Oct. 15, 2020.
Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.