What’s the real difference between a bonus and a commission?
They might both be ways to reward employees, but they come with their own rules when it comes to payroll and taxes.
For employers, knowing how each one works isn’t just helpful—it can prevent costly tax mistakes and make sure employees are paid fairly.
In this article, we’ll clear up any confusion by breaking down what makes a bonus different from a commission, how each type works, and what you need to know for accurate payroll and tax withholding.
What Types of Bonuses Are There?
It’s important to clarify from the beginning that there are two main types of bonuses: discretionary and non-discretionary.
Discretionary Bonus
A discretionary bonus is one an employer chooses to give as a gift or reward to employees. It’s awarded at the employer's discretion, which means it may or may not be given depending on the employer’s choice at the time.
Non-discretionary Bonus
On the other hand, a non-discretionary bonus is used to encourage employees to put in extra effort or meet specific targets. Unlike a discretionary bonus, it is not optional—if the employee achieves the outlined criteria, they will receive the bonus. Non-discretionary bonuses are typically included in an employee’s compensation package or agreed upon as a reward for achieving specific goals.
Are Commissions the Same as Bonuses?
A commission is typically a percentage of the revenue that comes from a sale. The larger the sale, the larger the commission.
A commission is different from a bonus, whether it’s discretionary or non-discretionary.
Even if your non-discretionary bonus is given for a sale, it wouldn’t be classified as a commission.
Depending on how your company structures sales incentives, payments to sales employees may be bonuses, commissions, or a mix of both. For example, sales reps may receive a 5% commission on each sale plus an additional bonus if they meet their sales quotas.
How Are Taxes Calculated for Bonuses and Commissions?
Now that we’ve clarified the difference between bonuses and commissions, we are left with a few questions: Do their discrepancies create tax calculation nightmares? Are commissions taxed differently from bonuses? And how does each compare to regular wages?
For tax purposes, both bonuses and commissions are considered supplemental wages and follow the same tax withholding rules.
If you pay your employee a regular wage—whether salary or hourly—you can include their bonus and commission earnings in their total wages, calculating taxes as if it were all regular wages.
However:
- If an employee only earns commissions and bonuses (with no regular wage), withhold 22% for federal withholding.
- If an employee earns over $1 million in supplemental wages, any earnings above that amount should be taxed at 37%.
For example, if your top-performing salesperson earns $1.5 million solely in commission and bonuses, tax withholding would be 22% on the first $1 million and 37% on the excess.
If manually calculating tax withholding on large sums seems daunting, consider outsourcing payroll management to simplify the process.
Including Non-Discretionary Bonuses and Commissions in Overtime Calculations
Besides tax withholding, non-discretionary bonuses and commissions are also included when calculating overtime for hourly employees.
If you’re paying commissions and/or non-discretionary bonuses to an hourly employee, you must include their commissions and non-discretionary bonus earnings in the overtime rate.
Calculating Overtime with Non-Discretionary Bonuses or Commissions:
- Add the employee’s total wages, including non-discretionary bonuses and commissions.
- Divide this total by the number of hours worked to get the adjusted hourly rate.
- Multiply by 1.5 to determine the overtime rate.
For example, if an employee earns $500 in commissions over 40 hours, you’d factor this into their adjusted hourly rate, ensuring they’re fairly compensated for overtime.
A discretionary bonus, however, does not need to be calculated into the overtime rate since it’s not guaranteed or tied to hours worked.
Bonuses and commissions are all about showing your team that their hard work matters.
Getting clear on the differences and handling each the right way isn’t just about checking a payroll box—it’s about making sure your employees feel valued and rewarded fairly.
By taking the time to get these details right, you’re not only avoiding payroll headaches—you’re building trust and boosting morale. And that makes a big difference in a positive workplace.
Still have questions?
At Whirks, we love to work closely with our clients to solve their unique and individual business problems. If you’re ready to make payroll easier and more effective, book a call with us to start the conversation.
OR if you'd rather keep learning – here are 5 Non-Cash Ways to Motivate and Appreciate Your Employees for more ideas on how to recognize your team and boost morale without spending a dime.
