Bonus vs. Commission: Overtime, Taxes, and Final Pay

The difference between a bonus and a commission comes down to what triggers the payment: a bonus rewards broader performance, milestones, or company results, while a commission ties your pay directly to a specific transaction you helped close. Both are treated as supplemental wages by the IRS, and both can raise your overtime rate, affect your retirement contributions, and determine what your employer still owes you after you leave. The label your employer uses matters less than how the payment is structured, because federal law looks at substance.

What Counts as a Bonus

A bonus is extra pay on top of your regular wages, tied to goals or performance that don’t hinge on a single sale. Federal law splits bonuses into two categories, and the split controls almost everything else about how the money is treated.

Nondiscretionary Bonuses

A nondiscretionary bonus is one the employer promised in advance or that follows a set formula. If your company announces that everyone hitting a production target gets $2,000 at year-end, that’s nondiscretionary. Attendance bonuses, safety bonuses, and efficiency bonuses fall in the same bucket. Once the bonus is announced or built into your compensation agreement, you can reasonably expect to receive it, and the fact that the employer technically reserves the option not to pay doesn’t make it discretionary.¹

Because you expect this pay, it must be included in your regular rate for overtime purposes.

Discretionary Bonuses

A truly discretionary bonus is one where the employer alone decides both whether to pay and how much, at or near the end of the period, with no prior promise or contract creating an expectation.¹ A holiday gift or a spontaneous spot bonus for exceptional work fits. You have no contractual right to the money, and it stays out of the overtime calculation.

Employers sometimes label a bonus “discretionary” even though it was promised or calculated by formula. Courts look past the label to whether you had reason to expect the payment.

What Counts as a Commission

A commission ties your pay directly to a transaction. It might be a percentage of the sale price, a flat amount per unit, or a tiered rate that climbs with volume. The defining feature is a measurable link between your work on a specific deal and what you earn from it.

Most arrangements are either base-plus-commission, where a guaranteed salary sits under your commission earnings, or commission-only, where every dollar depends on closing deals. Under either model, your total pay for the workweek must still meet the federal minimum wage for every hour worked.²

Watch Out for Draws

A draw is an advance on future commissions meant to smooth out slow periods. A recoverable draw acts like an interest-free loan: if your commissions fall short, you owe the difference back. A non-recoverable draw functions more like a guaranteed base, because you keep the money regardless. Your compensation agreement should say which applies. If it doesn’t, you can end up owing your employer after a slow quarter.

How Each One Affects Overtime

Under the Fair Labor Standards Act, non-exempt employees who work more than 40 hours in a workweek must receive overtime at one and a half times their regular rate.³ The regular rate includes all compensation for the week except for a short list of statutory exclusions. Commissions and nondiscretionary bonuses aren’t excluded, so they push your regular rate up and raise the overtime premium your employer owes.⁴

The Regular Rate Calculation

Add up your total compensation for the week (base pay plus any commissions or nondiscretionary bonuses earned that week), divide by hours worked, and that’s your regular rate. Multiply by 0.5 for the half-time premium, then multiply that by your overtime hours. Straight time on those hours is already in your check, so only the extra half needs to be added.¹

If you earned $480 in total compensation (including a $50 nondiscretionary bonus) and worked 43 hours, your regular rate is $11.16 per hour. The half-time premium is $5.58, and your three overtime hours generate an additional $16.74 in overtime pay.¹

Discretionary bonuses, holiday gifts, expense reimbursements, and contributions to retirement or insurance plans stay out of the regular rate.⁴ That is the practical payoff of the discretionary-versus-nondiscretionary split.

The Retail Commission Exemption

Retail and service employers can exempt commission-paid employees from overtime entirely, but only when three conditions all apply: you work at a retail or service establishment, more than half your total earnings in a representative period come from commissions, and your regular rate exceeds one and a half times the applicable minimum wage for every overtime workweek.² Miss any one condition and standard overtime applies. The exemption doesn’t reach outside retail and service industries.

If Your Employer Gets It Wrong

An employer that leaves commissions or nondiscretionary bonuses out of the regular rate owes you the unpaid overtime plus an equal amount in liquidated damages.⁵ The employer effectively pays double the shortage, plus your attorney’s fees. This is one of the most common FLSA violations, usually because payroll systems don’t recalculate the regular rate when supplemental payments hit.

How Each One Is Taxed

The IRS treats both bonuses and commissions as supplemental wages, meaning any pay beyond your regular salary or hourly earnings.⁶ Your employer picks between two withholding methods.

Flat Rate

If your supplemental wages for the year total $1 million or less, the employer can withhold a flat 22% for federal income tax. No other percentage is allowed under this method.⁶ It’s simple, but 22% may over-withhold for lower earners and under-withhold for higher ones. You reconcile at filing.

Aggregate

Under the aggregate method, the employer adds the supplemental payment to your most recent regular paycheck, treats the combined total as one payment, and withholds based on the standard tables. Withholding on that check is usually heavier because the math briefly assumes you earn at that inflated rate all year, but it tracks closer to your actual liability.⁶

Over $1 Million

Supplemental wages from a single employer exceeding $1 million in a calendar year are subject to a mandatory 37% federal withholding rate on every dollar above the threshold, regardless of what your W-4 says.⁶ The first $1 million can still use the 22% flat rate or the aggregate method. Large year-end commission payouts are the most likely trigger.

States often layer their own supplemental wage withholding on top of the federal rate, so your state’s rules affect the total tax bite on a bonus or commission check.

Retirement and FICA

Bonuses and commissions generally count as compensation for retirement plan purposes. If your 401(k) plan defines eligible compensation to include supplemental pay, your elective deferrals and any employer match apply. The 2026 employee deferral limit is $24,500.⁷ A big commission or bonus can push you toward that cap faster than expected. Review your deferral percentage before the payment arrives so you don’t max out early and miss employer matches in later paychecks.

Both are also subject to Social Security and Medicare taxes. Social Security tax applies to wages up to $184,500 in 2026.⁸ If your salary is already near that cap, a big supplemental payment can push you past it, and any wages above stop accruing Social Security tax for the rest of the year. The 1.45% Medicare tax has no cap.

What You’re Owed If You Leave

Whether you quit or get fired, the rules for collecting bonus and commission payments you’ve already earned depend on the type of pay and your state’s wage payment laws.

Commissions

Commissions fully earned before your last day are generally treated as wages that must be paid upon termination. The harder question involves deals you initiated that close after you leave. Many states follow some version of the principle that if you were the driving force behind a sale, you’re entitled to the commission after separation. Your written commission agreement typically controls, so read it before you resign. Where the agreement is silent, state law fills the gap, and most states have wage payment statutes that address outstanding commissions.

Bonuses

Nondiscretionary bonuses that have been earned by meeting stated criteria generally must be paid regardless of your employment status on the distribution date. If you hit every quarterly target but were laid off a week before payout, the employer likely still owes you. Discretionary bonuses work the other way. Because the employer holds sole control, leaving before the distribution date usually means no enforceable right to payment.¹ Many bonus agreements include an “active employment” clause requiring you to be on payroll on the payment date. Those clauses are usually enforceable for truly discretionary bonuses but often challenged when the bonus was functionally promised.

Final paycheck timing rules vary by state. If your last check arrives short on earned commissions or nondiscretionary bonuses, look up your state’s wage payment statute or file a complaint with your state labor agency.

1
U.S. Department of Labor. Fact Sheet 56C – Bonuses Under the Fair Labor Standards Act (FLSA)
2
U.S. Department of Labor. Fact Sheet 20 – Employees Paid Commissions by Retail Establishments
3
U.S. Department of Labor. Fact Sheet 23 – Overtime Pay Requirements of the FLSA
4
Office of the Law Revision Counsel. 29 U.S. Code 207 – Maximum Hours
5
Office of the Law Revision Counsel. 29 U.S. Code 216 – Penalties
6
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
8
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide