Understanding Commission Withholding: Insights from Ryan Gomez, CFP®

In a recent LinkedIn post, Ryan Gomez, CFP® sheds light on a common financial frustration for sales professionals: the significant difference between gross commission earnings and take-home pay due to tax withholding. Gomez, a Certified Financial Planner, breaks down the complex mechanics of how commissions are taxed, aiming to demystify the process for those who have experienced the shock of receiving substantially less than expected after taxes.

Gomez highlights a specific instance where a $60,000 commission resulted in only $32,000 after taxes, prompting his detailed explanation. He points out that the Internal Revenue Service (IRS) categorizes commissions as “supplemental income,” which can be subject to different withholding methods.

“The IRS treats commissions as ‘supplemental income.’ There are 2 ways companies withhold on them: 1 – The Percentage Method: Flat 22% federal withholding on any commission under $1M. 2 – The Aggregate Method: Your employer stacks your commission on top of your regular paycheck & withholds based on your combined income for that pay period.”

The financial planner elaborates on the “Aggregate Method,” explaining how it can lead to unexpectedly high withholding. This method involves combining a large commission payment with an individual’s regular salary for a given pay period. Payroll systems then annualize this combined income, creating a temporary income figure that appears much higher than the individual’s actual annual earnings, thus subjecting it to higher marginal tax rates.

The Impact of the Aggregate Method

Ryan Gomez, CFP® illustrates the potential pitfalls of the Aggregate Method with a hypothetical scenario. If a salesperson earns a $60,000 commission on top of a $10,000 monthly base salary, their payroll for that period effectively looks like $70,000. As Gomez explains, this inflated figure can push withholding into much higher tax brackets.

“This is where it gets ugly. That $60k commission + your $10k monthly base?.. Now it looks like $70k in one pay period. Payroll annualizes that income, making it look like you earn way more than you actually do. Now you’re being withheld at marginal rates up to the highest federal bracket (37%).”

He provides a concrete example for a commission in California, estimating the breakdown:

• Federal withholding: Approximately $20,500 (reflecting a blended rate across tax brackets)
• California state tax: $6,138 (at a 10.23% rate)
• Social Security: $0 (assuming the wage base limit was met)
• Medicare: $870 (at a 1.45% rate)

This calculation, as presented by Gomez, leads to a take-home amount of roughly $32,000 on the initial $60,000 commission, before any potential adjustments in April.

Withholding vs. Actual Tax Liability

Crucially, Gomez emphasizes that these withholding amounts are not necessarily the final tax bill. He clarifies that the figures are based on the temporary, annualized income during that specific pay period, not the individual’s total annual income and tax bracket.

“It feels criminal, but remember… This is just withholding, not your actual tax bill. You’ll true up in April based on your actual annual income & bracket. Some people get money back. Some owe more.”

According to Ryan Gomez, CFP®, the actual tax liability will be determined during the annual tax filing in April. Depending on the individual’s total annual income, deductions, and credits, they might receive a refund if too much was withheld, or they may owe additional taxes if the withholding was insufficient to cover their final tax obligation. His insights serve as a valuable reminder for commission-based earners to understand their pay structure and plan accordingly for tax season.