Why Your Commission Check Isn't Taxed Enough (And How to Fix It)

This post covers the same ground as the video above. Watch it on YouTube if you'd rather hear it.

Most reps open the pay stub after a big commission check and feel like the government took a massive bite. For a lot of high earners in sales, the check was taxed too little, and you find out in April.

Take a client I'll call Pete. He sells heavy equipment, and he had the best year of his career: a little over $350,000. At tax time he learned he owed another $20,000 he never saw coming. It rattled him enough that he missed the regular filing deadline and filed an extension, planning to pay that bill out of the following year's commission. The first thing I told him was that he hadn't done anything wrong. Nobody had ever explained how a commission check gets withheld.

I spent more than three years in sales before I started helping reps with their money, so none of this is theory to me. What follows is why it happens to good reps, and the four steps I have my clients take before April.

Why Isn't My Commission Check Taxed Enough?

Your employer has no idea what you'll earn this year, so it withholds commission at a flat 22% and hopes that lands close. The IRS classifies commission as supplemental wages, and under IRS Publication 15 an employer can withhold federal income tax on supplemental wages at 22%. A $5,000 check and a $25,000 check get the same percentage.

Your base salary works differently. It's withheld off the W-4 you filled out, which accounts for how you file, and that estimate usually lands close. Commission has no such form behind it, only the flat rate.

I tell clients it's like throwing darts with a blindfold on. You'll probably hit the board. You won't hit it with any accuracy.

The 22% is a withholding rate, and your tax rate is a separate number. Commission gets taxed as part of your total income, so it stacks on top of your base salary, which has already filled the lower brackets. Each commission dollar lands in a higher one. The only question that matters is whether your top bracket sits above 22%. For a single filer in 2026, the 22% bracket ends at $105,700 of taxable income and the 24% bracket runs to $201,775, per the IRS bracket tables. A rep with a $150,000 base is past the 22% bracket before the first commission check clears. Married filers get wider brackets, so run your own numbers.

Nobody sends you a bill for the difference during the year. It builds in the background, check after check, until April asks for all of it at once.

The same mechanism cuts the other way. If your top bracket is 22% or lower, a flat 22% over-withholds and you get a refund. That's the rep who says commission gets taxed to death, and for them it kind of does: they're lending the IRS money interest-free. Some employers also use the aggregate method, which tends to over-withhold on big checks; the paycheck breakdown shows how to tell which one yours uses.

How Big Is the Gap on a $200,000 Commission Year?

For a single filer with a $150,000 base, the federal gap comes to about $16,900. Suppose that rep earns $200,000 in commission on top of the base, for $350,000 total. After the $16,100 standard deduction, taxable income is $333,900. The base fills the first $133,900 of that, so the commission occupies the rest:

That comes to 8.45 cents on every commission dollar. The example assumes a single filer, no 401(k) deferral, and a base salary withheld correctly; it ignores FICA and state tax, which come out separately. Treat it as an illustration, because a CPA will run your real numbers, and yours will differ.

Tech reps get a second layer. RSUs are taxed as ordinary income when they vest and get added to your taxable income for the year, so a big commission year and a big vest year compound each other (the ISO vs RSU breakdown covers how each is taxed). Your state also has its own version of this withholding gap, with its own rules.

Step 1: How Do I Find My Gap Before April?

Ask a CPA to run a tax projection for the year, then compare the projected bill to what's being withheld. The difference between those two numbers is your gap, and every other step runs on it.

A good projection pulls in your base salary, what you've earned so far, what you expect to earn, RSUs that vest, and whatever your spouse earns. It tells you roughly what you'll owe next April. When I work with clients I help set up that conversation with their CPA and stay in it.

Run it more than once. Do it early in the year, then again after your biggest commission check, because the number keeps moving as the gap grows. Between CPA runs, the IRS Tax Withholding Estimator gives you a rough read in about ten minutes.

Step 2: Should I Close the Gap With My W-4?

Close part of it with your W-4, and leave the rest for steps three and four. Step 4(c) of Form W-4 lets you add a flat dollar amount of extra federal withholding to every paycheck. It's the simplest fix there is, because it happens behind the scenes and you never have to remember it.

It also works late in the year. The IRS generally treats withholding as if it came out evenly across the year, no matter when you raised it. Say you find a $16,900 gap in October with six biweekly paychecks left, and you cover $6,000 of it by adding $1,000 to each check. The IRS counts all $6,000 as paid evenly through the year.

The reason to stop short of the whole gap is that commission stays uneven. Set your W-4 for a monster year, then have a slower one, and you've over-withheld, which just means lending the IRS money you needed.

Step 3: Where Should I Keep the Rest of My Tax Money?

In a separate account you'll almost forget about until April, away from your checking and away from your primary savings. Every time a commission check lands, you move a slice of it over.

The separation matters more than the amount. Money in checking rarely leaves in one big purchase; it leaves in forty or fifty small ones. I'm not immune to that, and you aren't either. When tax money sits next to spending money, it starts to look like spending money. In a separate account it's already gone in your head.

How much you move comes from the projection in step one, since your CPA's gap number tells you how much extra to put aside. If you want a starting figure before you have one, set aside an extra 10% of each gross commission check on top of what's withheld. In the example above the federal gap works out to 8.45% of commission, so 10% covers it with about $3,100 left over for state tax. The full walkthrough on setting aside taxes explains how to adjust the percentage for your bracket and state.

Step 4: Should I Pay the IRS in Quarterly Installments?

Yes, once the gap is large enough that a lump sum in April would hurt. The IRS wants to be paid through the year, and underpaying can trigger a penalty. Think about it this way: if your employer handed you a full year's salary on one day, you wouldn't be happy, and the IRS feels the same about getting a year's tax in April.

Quarterly estimated payments are four due dates: April 15, June 15, September 15 and January 15. For 2026 income the last one falls on January 15, 2027, and you send each payment straight from your tax account. The IRS estimated taxes page has the payment methods.

A safe harbor rule protects you from the underpayment penalty if you pay in at least 100% of last year's total tax, or 110% if last year's adjusted gross income was over $150,000. Your CPA can give you the exact figure. The safe harbor only covers the penalty, so a rep whose income jumped still owes the balance when filing, and that balance is what the tax account is for.

What Does the Full System Look Like?

Each step covers part of what the others can't:

1. Your CPA projects what you'll owe and tells you the gap.
2. Your W-4 converts part of that gap into automatic withholding.
3. Each commission check tops up a tax account that sits apart from checking and primary savings.
4. The tax account pays the IRS in installments through the year.

Done right, April becomes paperwork. You aren't writing a lump-sum check, because the money already went out on a schedule.

What Can Break This Plan?

Three things, and I've watched all three happen. The first is the Q4 accelerator nobody saw coming. A huge check late in the year puts you well past the projection you ran in the spring, which is why the numbers need rerunning after the big check and not just once.

A job change resets the picture. Your new employer has no idea what you earned at the old one, so it withholds as if this job were your only income for the year, and every paycheck assumes you're earning far less than you are. Rerun the projection when you switch, and check the multiple-jobs step on the new W-4.

The third gets almost everybody, me included. The tax money gets borrowed. A big expense shows up, you tell yourself you'll put it back before April, and sometimes you do. Other times the commission check you were counting on comes in smaller than planned, and April arrives with the same shortfall you started with.

The video shows the dartboard version of all this. If you get paid on commission, subscribe to the channel. I built it for you.

Chris Brindle

Financial Planner -- Valor Investments and Planning

Chris Brindle is a financial planner who works specifically with sales professionals on commission, bonus, and equity income. Before becoming a planner, he worked in tech sales and lived the variable income, quota pressure and surprise tax bills his clients deal with now.

Book a free 30-minute call →