What's the Difference Between a Bonus and a Commission?

The Short Version
A bonus is a lump-sum payment you give to reward performance or hit a goal. A commission is a percentage of sales revenue paid to the person who closed the sale. Both are supplemental wages for federal income tax withholding and follow the same withholding rules (a flat 22%, or 37% on amounts over 1 million in supplemental wages for the year). The distinction that most employers don’t realize is that non-discretionary bonuses and commissions must be included when you calculate overtime for non-exempt employees (including hourly and salaried non-exempt roles). Discretionary bonuses don't.

A business owner tells us, "We gave our sales team a bonus for hitting quota." Then, we look closer and realize what they actually paid was a commission. Or they leave a promised production bonus out of an overtime calculation, not realizing that some bonuses legally have to be counted. Mixing up these two payments is one of the ways payroll goes sideways, often resulting in incorrect tax withholding, understated overtime, and a Department of Labor problem waiting to surface.

At Whirks, we run payroll for small businesses in Memphis, across the Southeast, and in most other states, and cleaning this up is one of the more common jobs we take on when a client comes to us from another provider. So we can tell you exactly where the line sits between a bonus and a commission, and why it matters for the paycheck.

To pay your team correctly and confidently, you need to know a few things: the two types of bonuses, how a commission is different, how each one is taxed, and the one rule that catches employers off guard when it's time to calculate overtime.

So, let's get into it.

Why the Bonus vs. Commission Distinction Matters for Payroll

Both land in an employee's paycheck as "extra" money, but bonuses and commissions behave differently when it comes to tax withholding and overtime. Misclassifying one as the other can lead to incorrect overtime pay, inaccurate withholding, and DOL compliance issues. The good news is that the rules are learnable, and once you see the categories, the differences are clear.

What Are the Two Types of Bonuses?

Not all bonuses are the same. The IRS and the Department of Labor distinguish between two kinds, and the difference has real payroll consequences.

What Is a Discretionary Bonus?

A discretionary bonus is one you choose to give at your own discretion. (I know, you probably realize that.) There's no prior promise or agreement. You decide to award it based on your own judgment. Common examples include:

• A year-end "thank you" bonus the owner decides to give after a strong year
• A surprise holiday or birthday gift
• A spot bonus for handling a difficult situation well

The defining feature: The employee had no expectation of receiving it, and you had no obligation to pay it.

What Is a Non-Discretionary Bonus?

A non-discretionary bonus is tied to specific, pre-established criteria. If the employee meets the conditions, they earn the bonus. It isn't optional. Common examples include:

• $500 for every quarter an employee maintains perfect attendance
• A production bonus for exceeding output targets
• A signing bonus promised during the hiring process
• A bonus tied to company profitability thresholds

The defining feature: The criteria were communicated in advance, creating an expectation. Once the employee meets them, the bonus is owed. This distinction matters more than most employers realize, and we'll explain why when we get to overtime.

How Are Commissions Different from Bonuses?

A commission is a payment calculated as a percentage of revenue from a specific sale or transaction. The larger the sale, the larger the commission. Even when a non-discretionary bonus is awarded for making a sale, it isn't automatically a commission. A commission is specifically a percentage of the sale amount, not a flat dollar reward for selling. Here's a quick way to tell them apart:

• Commission: "You'll earn 5% of every sale you close."
• Non-discretionary bonus: "You'll get $200 for every 10 units you sell."
• Discretionary bonus: "Great job on that deal. Here's $500."

Many compensation structures include a mix. A sales rep might earn a base salary, a 5% commission on every sale, and a $1,000 quarterly bonus for hitting quota. Each component follows its own rules for payroll and overtime.

Bonuses vs. Commissions at a Glance

How the three payment types compare across the factors that actually change what lands on the paycheck.

How Are Bonuses and Commissions Taxed?

For tax purposes, the IRS treats bonuses and commissions the same way: both are supplemental wages (IRS Publication 15, Section 7). The withholding rules are identical whether it's a discretionary bonus, a non-discretionary bonus, or a commission.

What's the Withholding Rate for Supplemental Wages?

If you also pay the employee a regular wage, whether salary or hourly, you have two options:

• Option 1: Combine the supplemental wages with regular wages and withhold as if the total were a single regular payment.
• Option 2: Withhold a flat 22% on the supplemental wages, separate from regular pay.

Two special cases are worth knowing:

• Commission-only employees: If someone earns only commissions and bonuses (no regular wage), withhold a flat 22% on all supplemental wages.
• Over $1 million: If an employee receives more than $1 million in supplemental wages in a calendar year, withhold 37% on everything above $1 million.

For example, if your top-performing salesperson earns $1.5 million in commission and bonuses for the year, you'd withhold 22% on the first $1 million and 37% on the remaining $500,000.

Social Security and Medicare taxes (FICA) apply to supplemental wages the same way they apply to regular wages: 6.2% for Social Security (up to the $184,500 federal wage base in 2026) and 1.45% for Medicare (no cap). State income tax rules vary, so your state’s treatment of bonuses and commissions may differ from federal rules.

Do Bonuses and Commissions Affect Overtime Calculations?

This is where the discretionary vs. non-discretionary distinction becomes critical, and where we see the most costly mistakes. Under the Fair Labor Standards Act (FLSA), non-discretionary bonuses and commissions must be included when calculating overtime for non-exempt (hourly) employees (DOL overtime requirements). Discretionary bonuses do not.

Why? The FLSA defines overtime as 1.5 times the employee's "regular rate of pay," and the regular rate includes all compensation the employee was expected to earn, not just their hourly wage. Because non-discretionary bonuses and commissions are expected compensation, they're part of the regular rate.

How Do You Calculate Overtime with Non-Discretionary Bonuses or Commissions?

• Step 1: Add the employee's total wages for the workweek, including non-discretionary bonuses and/or commissions.
• Step 2: Divide that total by the number of hours worked in the week to get the regular rate.
• Step 3: Multiply the regular rate by 1.5 to get the overtime rate, or multiply it by 0.5 to find the additional overtime premium.
• Step 4: Make sure the employee receives at least 1.5 times the regular rate for all hours worked over 40 in the workweek.

Example: An employee earns $15/hour, works 45 hours in a week, and also earned $200 in commissions that week.

• Step 1: Add total wages including commissions: (45 × $15) + $200 = $875
• Step 2: Divide by hours worked to get the regular rate: $875 ÷ 45 = $19.44/hour
• Step 3: Multiply the regular rate by 1.5 to get the overtime rate: $19.44 × 1.5 = $29.17/hour
• Step 4: Pay the overtime rate for hours over 40: 40 regular hours × $19.44 = $777.78, plus 5 overtime hours × $29.17 = $145.83, for $923.61 total

Now, compare that to the same week if you'd forgotten to fold the commission into the regular rate. With the commission counted, the regular rate is $19.44, the overtime rate is $29.17, and the total is $923.61. Leave the commission out of the rate, and the regular rate stays at $15.00 with an overtime rate of $22.50; the $200 still gets paid, but it never raises the overtime rate, for a total of $912.50. 

Leaving the commission out understates the overtime you owe by $11.11 for the week. That looks small on one paycheck, but it adds up quickly across multiple employees and pay periods, and it’s one of the most common regular-rate errors the Department of Labor flags under the FLSA. A discretionary bonus, like a surprise holiday gift, does not need to be factored into the overtime rate, because it wasn't expected or promised.

Overtime gets even more involved when tipped wages and multiple pay rates come into play, but the underlying rule is the same: Expected compensation belongs in the regular rate.

The Most Common Bonus and Commission Mistakes Employers Make

When we start working with new clients, we see the same handful of mistakes come up again and again. These cause the most problems:

1. Mislabeling non-discretionary bonuses as discretionary. If you promised it in advance or tied it to specific criteria, it's non-discretionary, and it must be included in overtime.
2. Leaving commissions out of overtime calculations. Even a small commission affects the regular rate. Skipping it is an FLSA violation.
3. Confusing sales bonuses with commissions. A flat dollar amount for a sale is a bonus; a percentage of the sale is a commission. The distinction shapes how you structure and communicate the plan.
4. Not documenting the compensation structure. We've seen employers pay a rep $300 for closing 5 deals and call it a commission when it's actually a non-discretionary bonus. The classification determines how overtime is handled, so getting it labeled right matters.

Paying Bonuses and Commissions Correctly Comes Down to the Details

Once you can see the categories, the difference between a bonus and a commission becomes clear. A bonus is a set amount you decide to give (often a flat dollar amount), a commission is a percentage of a sale, and whether a payment was promised in advance is what tells you if it belongs in the overtime math.

It's worth getting right because the small stuff is where it bites. A commission left out of one overtime calculation or a promised bonus miscategorized as discretionary might seem minor, but those gaps compound across every employee and every pay period until an audit or a back-wage claim surfaces them.

Once you know the difference, the next question is usually how to actually pay one out so your employee keeps as much of it as possible. Getting that right every pay period is what we do at Whirks, and it's what we walk through in Everything You Need to Know About Giving Bonuses, the withholding methods that change what lands in their pocket.

Frequently Asked Questions About Bonuses and Commissions

Are bonuses and commissions taxed at different rates? The IRS classifies both as supplemental wages, so they follow the same federal income tax withholding rules: a flat 22% (or combined with regular wages), and 37% on any supplemental wages over 1 million in a calendar year. State rules vary. For example, in Tennessee, there's no state income tax on wages, so this is a federal consideration for our local clients.

Do I have to include commissions in overtime even if my sales team is salaried? It depends on whether the employee is exempt or non-exempt under the FLSA. Exempt employees (who are often, but not always, salaried) aren’t entitled to overtime, so the calculation doesn’t apply to them. But if you have non-exempt employees who earn commissions (even with a base salary), those commissions must be included in the regular rate for overtime.

Can I make all my bonuses discretionary to avoid the overtime issue? No. The Department of Labor looks at substance, not the label. If employees know about a bonus in advance and it's tied to specific criteria (attendance, sales targets, production goals), it's non-discretionary regardless of what you call it in your handbook.

What if a commission spans multiple pay periods? The commission should be allocated back to the pay periods in which it was earned, and overtime for each of those periods recalculated. This gets complex with monthly or quarterly payouts. A payroll provider experienced in commission-based pay can handle the allocation automatically.

Do commission-only employees get a W-2 or a 1099? If the person is a W-2 employee (not an independent contractor), they get a W-2 regardless of whether they earn a base salary, commissions, or both. The commission vs. bonus distinction has nothing to do with W-2 vs. 1099. That's determined by the worker's employment classification.

Can bonuses and commissions be combined in one compensation plan? Yes, and many businesses do. A common structure is a base salary plus commissions on sales plus a quarterly bonus for meeting team goals. The key is to document each component clearly so payroll can handle withholding and overtime correctly for each one.

This article is for general informational purposes only and is not legal or tax advice; talk with your CPA, employment attorney, or payroll provider about your specific situation.