Tax question

[TomCat88]

Are commissions and bonuses taxed at a higher rate than income from a regular job?

[Cledus]

Are commissions and bonuses taxed at a higher rate than income from a regular job?

Shouldn't be. Should be taxed at whatever your ordinary income tax rate is (I think). I'm a CPA, but not the kind who does taxes so take it with a grain of salt.

[SonomaCat]

Are commissions and bonuses taxed at a higher rate than income from a regular job?

They aren't taxed at a higher rate, but they are withheld at "superwithholding" rates. For bonuses and other non-salary payments, the taxes are withheld at rates as though you are in the highest tax brackets (or something like that).

But when you do your tax return, that income will be treated the same as any other income ... so you tend to have a lower payment due/higher refund if you have a lot of those superwithholding items in your paycheck throughout the year.

[Hi-Line Bobcat]

This is true I'm a CPA any type of bonus or overpayment is automatically withheld as if you are in the next tax bracket. The IRS assumes you will receive the bonus every paycheck. In the long haul it won't make any difference because at the end of the year most you will not be in a higher tax bracket due to the bonus. Your tax refund will reflect this at year end.

[TomCat88]

Thanks. That's what I thought. Reason I was asking is I've heard quite a few people tell me that they get taxed at a higher rate due to being on commission and that's why they were voting a certain way. I doubt, however, finding out that's not the case will change their mind. It could be that they knew that, but were trying to sway others to vote their way.

[PortlandCat]

Many people on commission are self employed so they may be paying both sides of the self employment tax, which makes the marginal tax rates seem significantly higher on the firs $100k or so.

[SonomaCat]

Thanks. That's what I thought. Reason I was asking is I've heard quite a few people tell me that they get taxed at a higher rate due to being on commission and that's why they were voting a certain way. I doubt, however, finding out that's not the case will change their mind. It could be that they knew that, but were trying to sway others to vote their way.

So who do they vote for ... the candidates who promise to cut the special taxes on commissions and bonuses that don't exist?

Just for fun, you could always point out to those people that their taxes are almost certainly lower now than any other time in decades ... but if they are the kind of folks I think you are hinting at, those kinds of facts are ones that they will either choose not to accept or just ignore completely because it doesn't fit into their preconceived narrative.

In general, for income tax purposes, any income you make from an employer or earn from being self-employed will all be taxed at the same rates (although self-employed do face the higher FICA taxes, as PortlandCat noted). The income types that are taxed at lower rates are certain kinds of "unearned income," which are things like dividends and capital gains. Those have special tax rules in place that provide for lower tax rates in many cases.

So, generally speaking, "earned income" is taxed at higher rates than "unearned income." Whether that is good public policy or not is subject to debate, but that's a quick and dirty way to think about how our tax system is structured.

[CPACAT]

Thanks. That's what I thought. Reason I was asking is I've heard quite a few people tell me that they get taxed at a higher rate due to being on commission and that's why they were voting a certain way. I doubt, however, finding out that's not the case will change their mind. It could be that they knew that, but were trying to sway others to vote their way.

So who do they vote for ... the candidates who promise to cut the special taxes on commissions and bonuses that don't exist?

Just for fun, you could always point out to those people that their taxes are almost certainly lower now than any other time in decades ... but if they are the kind of folks I think you are hinting at, those kinds of facts are ones that they will either choose not to accept or just ignore completely because it doesn't fit into their preconceived narrative.

In general, for income tax purposes, any income you make from an employer or earn from being self-employed will all be taxed at the same rates (although self-employed do face the higher FICA taxes, as PortlandCat noted). The income types that are taxed at lower rates are certain kinds of "unearned income," which are things like dividends and capital gains. Those have special tax rules in place that provide for lower tax rates in many cases.

So, generally speaking, "earned income" is taxed at higher rates than "unearned income." Whether that is good public policy or not is subject to debate, but that's a quick and dirty way to think about how our tax system is structured.

Only qualified dividends and long term capital gaines received special tax rates. One thing a lot of people get confused on with bonuses and commissions is that they may be withheld at a higher rate due to the compression of the timing of the income but they are taxed for income tax purposes at the same rate as regulare wages.

[SonomaCat]

Only qualified dividends and long term capital gaines received special tax rates.

Yep ... just didn't want to get into too much detail on all of that. It's always hard for me to know where best to draw the line on that sort of thing.

[John K]

Many people on commission are self employed so they may be paying both sides of the self employment tax, which makes the marginal tax rates seem significantly higher on the firs $100k or so.

That doesn't make any sense. Commissions are payed by an employer to an employee, and represent a percentage of the revenue produced for his employer by the employee. Anyone earning commissions, almost by definition, would actually not be self employed, since those commissions would have to be paid by someone, i.e an employer. Someone who is self employed obtains his income directly from his customers, which would be business income, not commissions.

[CPACAT]

Many people on commission are self employed so they may be paying both sides of the self employment tax, which makes the marginal tax rates seem significantly higher on the firs $100k or so.

That doesn't make any sense. Commissions are payed by an employer to an employee, and represent a percentage of the revenue produced for his employer by the employee. Anyone earning commissions, almost by definition, would actually not be self employed, since those commissions would have to be paid by someone, i.e an employer. Someone who is self employed obtains his income directly from his customers, which would be business income, not commissions.

An example of someone who receives commissions and is self employed would be an insurance salesman. Many of them are self employed and sell products from multiple companies and receive a commission on policies written.

[PortlandCat]

Many people on commission are self employed so they may be paying both sides of the self employment tax, which makes the marginal tax rates seem significantly higher on the firs $100k or so.

That doesn't make any sense. Commissions are payed by an employer to an employee, and represent a percentage of the revenue produced for his employer by the employee. Anyone earning commissions, almost by definition, would actually not be self employed, since those commissions would have to be paid by someone, i.e an employer. Someone who is self employed obtains his income directly from his customers, which would be business income, not commissions.

An example of someone who receives commissions and is self employed would be an insurance salesman. Many of them are self employed and sell products from multiple companies and receive a commission on policies written.

Most real estate agents are also in this group - you may perceive them as working for a company but in truth they are independent contractors.