I am asking a prospective employer for a $60,000 salary. They have come back and offered a $48,000 salary and a guaranteed $1,000 monthly commission to arrive at the $60,000. Is this an “apples to apples” situation, or will there be differences in the take-home pay between those two scenarios? Is the salary portion taxed at a different rate than the commission portion?
There may be differences in take-home pay between the two options because of federal income tax withholding differences. Withholding on regular wages is based on the IRS's income tax withholding tables, taking into account the personal data you submit on your Form W-4, Employee's Withholding Certificate, for the number of allowances you are claiming, filing status, etc. Commissions are considered by the IRS to be supplemental wages and are subject to different withholding requirements (as compared to regular wages), depending on how the commission amounts are paid to you.
If your salary and commission income are combined into one paycheck and the amount of the supplemental wages is not specified as being separate and distinct from regular wages, then your federal income tax withholding would be on the total amount (as if it were a single wage payment). In this case, there would be no difference in your take-home pay when comparing your two scenarios as outlined.
If the salary and commission income you receive are combined into one paycheck but the amounts for each are specifically indicated, or if you receive the commission income on a separate paycheck, then the employer may withhold at a flat 22 percent tax rate on the amount of supplemental wages. Accordingly, your $12,000 of commission income would be subject to withholding at 22 percent, while your $48,000 of salary would be subject to the withholding rate as designated on the federal income tax withholding tables.
Regardless of the tax withholding differences that could exist, both commission and salary income are taxed using the ordinary income tax rates, meaning your annual income tax liability will be the same under either scenario. In other words, while the amount of federal income tax withheld from each paycheck could be different, and result in differences in take-home pay, the total amount of income tax liability on your income for the year would be the same under each scenario.
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Answered by: James G. McGrory, CPA, and Stephanie K. Otake, CPA, are with Drucker & Scaccetti in Philadelphia.