Why are commission earnings taxed at a higher rate that hours worked earnings?

Answer 1

Technically speaking, all income (except for long term capital gains) is taxed at the same rate. However, the reason you have additional withholding taken from commission checks is so that your income tax withholding doesn't fall short at the end of the year. Also, it's a byproduct of the mathematics of the tax table. For example, let's say you normally earn $2,000/month. That calculates out to $24,000/year, and your tax would be calculated based on $24,000 yearly income. Then, let's say you receive a commission check of $5,000 for the month of December. Now, if you think like the IRS tables do, this means you now earn $60,000/year (5,000 x 12). So, your tax withheld will be based on the assumption that you earn $60,000/year, which means far greater tax withheld.

Isn't math a wonderful thing? ;)

Answer 2

You may be thinking about the self employment tax that you pay on commissions versus having FICA being withheld from you pay check. Yes you are more out of pocket on commissions taxed as self employment income when compared to similar amounts of general "W-2" wages.

Answer 3

They are not. It's just that the commissions may have raised your "expected earnings" and subsequent tax rate. It will all even out when you do your taxes anyway. Don't worry.