A $200,000 OTE on the offer letter and the deposit hitting the rep’s bank account on payday are not the same number. Commission is taxed differently from base salary in how it shows up in each paycheck, even though the final tax bill at year-end is the same. The gap between the headline OTE and what the rep actually keeps is the source of most pay surprises, especially for new sales hires moving from a salaried role. This guide explains how sales commission is taxed in the United States, why the supplemental withholding rate makes commission look more heavily taxed than it actually is, and what reps and hiring managers should both know before signing an offer. For context on how commission fits into total pay, see the pillar guide on On Target Earnings, and for the underlying math on commission itself, see how to calculate sales commission.

How Sales Commission Is Taxed

Federal tax law treats sales commission as ordinary income. The final tax owed on commission is identical to the tax owed on an equivalent dollar of base salary, governed by the rep’s marginal tax bracket. What differs is the withholding mechanism, the slice that the employer holds back from each paycheck and sends to the IRS on the rep’s behalf.

Commission is one form of what the IRS calls supplemental wages. The same category covers bonuses, severance, retroactive raises, and most kinds of variable pay. Supplemental wages are subject to a special withholding rule, which is the source of nearly all the confusion about commission tax.

A note on scope: this guide describes how commission is taxed for W-2 employees, the structure used by the vast majority of B2B sales roles. Independent sales reps paid on 1099 forms face a different set of rules, including self-employment tax and mandatory quarterly estimated payments, and should consult a CPA for specifics.

Why Commission Checks Look Smaller Than Expected

Short answer: yes, this is normal, and no, your tax rate did not actually change. Most employers withhold from commission at the flat 22 percent supplemental rate the IRS allows, which is often higher than the rate withheld from a regular paycheck. The gap between expected and actual deposit is a withholding effect, not a tax-rate change.

Many sales reps believe commission is taxed more heavily than salary because a commission check often shows a larger withholding percentage than a regular paycheck. In practice, the gap is almost always caused by supplemental wage withholding rules, not by a different tax rate. The total tax owed at the end of the year on a dollar of commission is the same as the total tax owed on an equivalent dollar of base salary.

In short: a smaller paycheck on a big commission month reflects how the IRS asks employers to withhold from variable pay, not the actual tax bill. Any over-withholding gets refunded at filing time; any under-withholding produces a balance due.

The Supplemental Withholding Rate (22% and 37%)

Per IRS Publication 15, employers must withhold federal income tax on supplemental wages using one of two methods. The first, the percentage method, applies a flat 22 percent federal withholding rate to supplemental wages up to one million dollars per employee per year. The second, the aggregate method, treats supplemental wages as if they were regular wages and uses the rep’s W-4 (the form employees complete at hire to control how much federal income tax is withheld from each paycheck) to compute withholding.

Many employers use the percentage method because it is simpler to administer and predictable for reps. For supplemental wages above one million dollars in a single calendar year, the IRS mandates a 37 percent withholding rate on the amount above one million, regardless of method.

The 22 percent flat rate is the source of the common rep complaint that commission is taxed at a higher rate than salary. It is not. The 22 percent is the withholding rate, not the tax rate. The actual tax owed is determined at filing time based on total annual income across all sources.

FICA and State Withholding

On top of federal income tax withholding, commission is subject to FICA the same way base salary is. Social Security tax runs at 6.2 percent of wages up to the annual wage base, which is adjusted each year by the Social Security Administration. Medicare tax runs at 1.45 percent of all wages with no cap. An additional 0.9 percent Medicare surtax applies to wages above $200,000 for single filers and $250,000 for joint filers. For most reps, FICA on commission lands at the combined 7.65 percent. Once total annual wages pass the Social Security wage base, the 6.2 percent piece stops and only Medicare continues, so FICA on each additional dollar drops to 1.45 percent (or 2.35 percent with the surtax above $200,000).

State income tax withholding varies widely. California, New York, and several other states apply separate supplemental withholding rates to bonuses and commission, often different from the rate used on regular wages. Texas, Florida, Washington, Nevada, Tennessee, New Hampshire, South Dakota, Wyoming, and Alaska have no state income tax at all, so commission earned in those states avoids state withholding entirely. Reps working across state lines, common in field sales, may have withholding obligations in multiple states depending on residency, work location, and employer payroll rules.

OTE vs Take-Home: A Worked Example

Consider an enterprise account executive in California with a $200,000 OTE on a 50/50 mix. The figures below are illustrative; actual withholding varies by filing status, W-4 elections, pay frequency, deductions, and the employer’s payroll setup. At full attainment, the math looks roughly like this:

Gross pay: $100,000 base plus $100,000 commission, totaling $200,000.

Federal income tax withholding on base: effective rate depends on the rep’s W-4 elections and filing status; for a single filer in this bracket, withholding on base typically lands somewhere in the low to mid teens as a percentage, or around $12,000 to $16,000.

Federal income tax withholding on commission: 22 percent flat supplemental rate, or $22,000.

FICA: Social Security at 6.2 percent up to the annual wage base plus Medicare at 1.45 percent on all wages, totaling roughly $13,000 to $14,000 depending on the current wage base. The 0.9 percent Medicare surtax adds approximately zero in this case because it only applies to the slice above $200,000.

California state withholding: California applies its own supplemental rate to commission separate from regular wage withholding, with combined state withholding typically landing in the low double digits at this income level.

Net take-home before retirement contributions and benefits: roughly two-thirds of gross, in the neighborhood of $130,000 to $140,000 in this illustrative scenario. The rep’s actual tax liability at filing time may be higher or lower than withheld, producing either a refund or an additional payment in April.

What This Means for Hiring Conversations

The 22 percent supplemental withholding rate has two implications for reps and hiring managers. First, for reps in tax brackets above 22 percent, withholding will under-cover the actual tax liability, meaning a tax bill in April. Reps moving from a $100K salary to a $200K OTE often discover this the hard way. Second, for reps in brackets below 22 percent (some SDRs, newer reps, those with significant deductions), withholding will over-cover the liability, producing a refund.

Hiring managers should be specific in offer conversations about base versus variable, attainment assumptions, and the timing of commission payments. The framing matters: a $200,000 OTE communicated without context about variability and tax treatment sets up a candidate to be disappointed when the first commission check arrives smaller than expected. For broader context on how pay mix shapes take-home volatility, see sales commission structures, and for benchmark data on what each role actually earns, see the sales compensation benchmarks guide.

Practical Tax Planning for Sales Reps

Three habits help reps manage commission tax. First, model take-home before accepting an offer, not after. A paycheck calculator with a supplemental wages field, the kind offered by SmartAsset or ADP, provides a reasonable estimate. Second, review the W-4 each year and after any significant change in income. Reps with consistently large refunds are over-withholding and lending the IRS money interest-free; reps with consistently large balances due may need to adjust withholding to avoid an underpayment penalty. Third, for reps with persistent shortfalls at filing time, the simplest fix is to increase payroll withholding via the W-4. For more complex situations such as outside income or significant late-year commission swings, quarterly estimated tax payments are another option.

Per IRS Publication 15-T, employers can apply either the percentage method or the aggregate method, and reps can ask their payroll team which one is being used on their commission. Knowing the method makes the paycheck math predictable.

The Bottom Line

Commission is not taxed more heavily than base salary. The 22 percent federal supplemental withholding rate creates the appearance of heavier taxation in each paycheck, but the actual tax liability at filing time is identical to a salary of the same total. The real planning challenge for reps is the gap between gross OTE and net take-home, which can easily reach 30 to 35 percent for a high earner in a high-tax state. Companies that explain this clearly during offer conversations have better-prepared new hires; companies that do not lose trust in the first quarter.

This guide provides general information about how sales commission is taxed in the United States. It is not tax advice. Tax rates and rules change; rep situations vary. Consult a licensed CPA or tax advisor for guidance specific to your circumstances.