Most taxpayers want to file their taxes correctly and stay on Uncle Sam's good side. Doing so often proves difficult, however, especially when you have multiple sources of income. One such possible income source is commission. If you receive commission income, where you find it and report it varies based on whether you were an employee or an independent contractor.
TL;DR (Too Long; Didn't Read)
If you received commission as an employee, report the income on line 7 of your Form 1040. If you're self-employed or considered an independent contractor, report your commission income on your Schedule C or Schedule C-EZ.
Commission Definition and Reporting
A commission payment is one you receive in exchange for accomplishing a specific goal. You receive hourly wages or a salary simply for going to work and doing your job every day. A commission payment, however, is generally earned by making a sale or completing a specific transaction. Those in car sales, for example, often receive a commission for every car they sell. Real estate agents work on commission as well, receiving payment only after a house is bought or sold. If you're an employee who receives commission pay, your employer will usually deduct taxes from your commission when paying you. Most employers withhold income tax from commissions at the same rate they do regular pay. Others may use a flat 22 percent commission tax rate. The amount of your commission for the year is then reported on your W-2.
While the commission definition doesn't change from one industry to the next, how and where you report the income does. The IRS often considers real estate agents, insurance brokers and many other commission earners to be self-employed. If you're a contractor rather than an employee, the self-employment rules generally apply to you. In this case, any commissions you earn during the year get reported to you on a Form 1099-MISC at the end of the tax year. You'll only receive a Form 1099, however, from clients who paid you more than $600 over the course of the year. As a result, you'll need to keep records of how much commission you made. If you received $500 in commissions from the ABC Company, it's taxable commission income. ABC Company won't have to send you a 1099 form, however, because you made less than the $600 threshold. You'll need to track and report the commission on your own so you don't run afoul of the IRS.
2018 Commission Reporting
When filing your 2018 taxes, report commissions paid to you by your employer on line 7 of your Form 1040. You'll find your commission income combined with your regular wages in box 1 of your W-2. If you received a Form 1099, you'll find your commission earnings in box 7. Report this commission and other income on line 1 of your Schedule C or Schedule C-EZ. You will also use the Schedule C or C-EZ to report commission income if you receive a W-2 with the statutory employee box checked on line 13.
2017 Commission Reporting
The general tax rules for reporting commissions remained unchanged between 2017 and 2018. A change in the law does, however, stop commission earners from deducting unreimbursed employee expenses in 2018. If you're filing your 2017 taxes late or amending your return, make sure you remember to include these deductions as allowed for the 2017 tax year. Accidentally referring to the 2018 tax laws could result in missed deductions and a higher tax amount.
- Investopedia: If an Employee is Paid by Commission, Who is Responsible for Withholding Taxes?
- IRS: 2017 Form 1040 Instructions
- Patriot Software: What Is Commission?
- IRS: Statutory Employees
- IRS: 2017 Instructions for Schedule C
- Forbes: What Your Itemized Deductions On Schedule A Will Look Like After Tax Reform
- 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.
Michelle earned her accounting degree summa cum laude and has extensive experience in business management and accounting. Entrepreneurship is in her blood, and her work focuses on helping small businesses successfully compete in a big market. Michelle also knows the value of a dollar and enjoys helping readers understand how best to maximize their money and enjoy a healthy financial life. Her work appears Chron's small business site. She has also worked on small business blogs for a national insurance chain.