I was playing golf with a buddy over Memorial Day weekend. We got to talking about work - he’s an account executive at a high-level enterprise software company - and he kept bringing up how “criminal" it is that every commission check is whacked with 40% of taxes.
I hear some version of this every month. A client looks at a bonus deposit, a commission check, an RSU vest, sees a number different than expected, and assumes the government just took 40 cents on every dollar.
This common misunderstanding leads to bad planning, wrong assumptions about what you owe, and a tax bill in April that feels like it came out of nowhere.
Here’s what’s actually happening:
The Short Version
Withholding is a deposit, not a final tax bill
Bonuses, commissions, and RSU vests are ordinary income stacking on top of your salary in the same bracket system
The “they took 40%” complaint usually combines federal withholding, state tax, and FICA into one misleading number
The standard 22% withholding is too low for most high earners but the 37% rate can be too high
Either way, the real math happens once per year when all income is assembled
What He’s Actually Seeing
His employer withheld federal tax on that commission probably at the standard 22% flat rate the IRS requires on supplemental income. Then the state took its cut. Then FICA hit on top.
Stack those together and the check looks 35-40% lighter. So he rounds up, calls it 40%, and assumes that’s his tax rate on commissions.
It’s not. That’s three different withholdings lumped into one complaint.
This is the part almost everyone misses.
Withholding is not your tax bill. It’s an estimated payment; a deposit toward what you’ll actually owe when your return is filed.
Your employer doesn’t know your full financial picture. They don’t know your spouse’s income, your side gigs, your capital gains, or your deductions. They just apply a formula to your paycheck and send it to the IRS.
The real tax bill gets calculated once per year when all income is assembled
How the Tax System Actually Works
The U.S. tax system is progressive. Income fills up brackets from the bottom, one layer at a time.
The first dollars you earn are taxed at 10%. Then 12%. Then 22%, 24%, 32%, 35%, and 37% at the top.
Your commission doesn’t get its own rate. It doesn’t get special treatment. It’s ordinary income… same as your salary, your bonus, your RSU vests.
It just lands on top of the stack.
So if your base salary already fills brackets up to $250K, a $60K commission lands in the 35% bracket. Not 22%. Not 40%. The withholding was a rough estimate. The bracket is where the actual math lives.
The Gap Goes Both Directions
Here’s what makes this tricky. The withholding isn’t just wrong but it’s wrong in different directions depending on where you sit.
If you’re a high earner with a $300K base and a $80K bonus, your employer withheld that bonus at 22%. But your marginal rate is 35%. You’re under-withheld. That gap shows up as a bill in April.
Now flip it. If you’re income gets withheld at 37% but after deductions, charitable giving, and other planning your effective rate on that income comes in lower… you’re over-withheld. That gap shows up as a refund.
Neither outcome means you were taxed unfairly. It means the withholding formula doesn’t know your life. It’s a blunt instrument applied to a precise situation.
The person celebrating a big refund in April? They gave the government an interest-free loan all year. The person shocked by a big bill? They had the use of that money all year but didn’t plan for the settlement.
Same system. Same math. Different side of the gap.
The Whole Picture Matters
The real issue isn’t any single paycheck. It’s that most people evaluate their tax situation one check at a time instead of looking at the full year.
Salary, bonus, commissions, RSU vests, investment income, your spouse’s income… it all flows into one return. It all stacks into the same brackets.
Until you’ve mapped total household income against the full bracket structure, you’re guessing and guessing is how you end up on the wrong side of the gap every April.
Playing the Long Game
Pull up your most recent bonus or commission pay stub. Find the federal withholding line… it’s probably 22%.
Now pull up last year’s tax return. Find your marginal federal rate on the 1040.
The difference between those two numbers, multiplied by every supplemental dollar you earn this year is your gap. That’s the April bill or the interest-free loan, depending on which side you’re on.
If the gap is more than $5K, you have a planning decision to make before December. Not April.
Interested in Learning More?
Let’s start with a short, 20-minute conversation to see if there’s an opportunity to improve clarity, structure, or long-term outcomes.
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