Your commissions can make up all or part of your compensation package. Because commission is taxable, it must be reported to the Internal Revenue Service. How it’s reported depends on whether you’re an employee or an independent contractor. If you’re an employee, your employer reports your commissions on your annual W-2. If you’re an independent contractor, the contracting party might need to report it on Form 1099-MISC.
Review Box 1 of your W-2 for your annual gross wages. All of your wages subject to federal income tax must go in this box, including commissions. As a commissioned employee, you might receive straight commissions or salary plus commissions. If you receive salary as well as commissions, your salary payments are also in Box 1.
Report the amount in Box 1 of your W-2 on Form 1040A or Form 1040EZ at tax time. If you’re filing a joint return, include your spouse’s income. For example, if you’re a joint filer with no dependents, you may use Form 1040EZ. State your wages from Box 1 of your W-2 on Line 1 of your 1040EZ.
Subtract your deductions or adjustments to income from your gross income to get your adjusted gross income. These adjustments lower your taxable income and ultimately your tax liability. Your AGI shouldn't exceed the amount on Line 1 of your 1040EZ or Line 7 of your 1040A.
Look in Box 7 of the 1099 form that the contracting party sent you for your commissions. Box 7 has all the income you received from the contracting company or person, who should also send you a 1099 if they paid you $600 or more during the year.
Report commissions on Form 1040 even if the contracting company or individual didn’t send you a 1099 or if your taxable income is less than $600 for the year.
Use Schedule C or Schedule C-EZ to report your self-employment income, including commissions. Use the form to claim your deductions and to arrive at your net profit or loss. Attach the Schedule C or C-EZ to your 1040.
- Follow the state revenue agency’s guidelines for reporting commissions and claiming deductions for state income tax purposes, if applicable. For example, in California, an insurance sales employee who uses his car and phone for business reasons can’t claim deductions for those items on his state tax return. This is because those expenses are part of his commission earnings on his W-2. If he’s self-employed, however, he can claim those deductions, since they aren’t part of his commission rate.
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- IRS.gov: Form 1040A
- Small Business Administration: Which Tax Form Should You File? Schedule C or the (Easier) Schedule C-EZ?
- California Employment Development Department: Total and Partial Unemployment TPU 460.2
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