Tax Deductions From Commission Income
How are income taxes calculated when an employee receives straight commission income vs periodic commission vs a combination of salary and commissions?
Paying an employee commission or salary plus commission, his or her pay is taxed in one of the following ways:
Employees who earn commission without expenses:
- When commission is paid at the same time as salary, the commission amount is added to the salary, and any of these methods can be used: Payroll Deductions Online Calculator (easiest), the computer formulas or the tax tables method.
- When commissions are paid periodically or the amounts fluctuate, the "bonus method" is used to determine the tax to deduct from the commission payment. See the article on "Bonuses and Retroactive Pay" in this newsletter.
Employees who earn commission with expenses:
- When commissions are earned and the employee incurs expenses, the employee can elect to complete a TD1X, Statement of Commission Income and Expenses for Payroll Tax Deductions, in addition to the TD1.To calculate the amount of tax to deduct, use the Payroll Deductions Online Calculator (easiest), the computer formulas or the tax tables method.
If an employee does not file aTD1X form, or revokes in writing-during the year-the election he or she made in completing the TD1X, the total claim amount from the employee's TD1 form is used.
Employees who claim employment expenses on their income tax return must have their employer complete Form T2200, Declaration of Conditions of Employment. For more information on when a T2200 is required, visit our previous blog article here.