How are 1099 commissions taxed?
A 1099 commission is taxed twice over: once as ordinary income at your federal and state brackets, and again with self-employment tax ā 15.3% on most of your net earnings, covering both halves of Social Security and Medicare. Nothing is withheld when the check arrives, so the full liability is yours to calculate, set aside, and pay quarterly. For a successful broker, the combined marginal bite on the next commission dollar frequently lands between 35% and 50% before planning.
Layer one: ordinary income tax
Commission income is ordinary income ā no capital-gains rates, no special treatment. Your net commissions (gross minus business expenses) flow onto your return and stack on top of any other income, filling up the federal brackets. Most states with an income tax take their cut on top.
Layer two: self-employment tax
This is the layer that surprises brokers coming from W-2 life. As an employee, you paid 7.65% for Social Security and Medicare and your employer paid the other 7.65%. As a 1099 broker, you're both parties. Self-employment tax runs 15.3% ā 12.4% Social Security on earnings up to the annual wage base ($184,500 in 2026) plus 2.9% Medicare with no cap ā applied to 92.35% of your net self-employment earnings. High earners add a 0.9% Additional Medicare Tax above certain thresholds.
Two softeners: half of your SE tax is deductible against income tax, and the QBI deduction (below) trims the income-tax layer. Neither touches the SE tax itself.
What the stack looks like on a real year
Illustrative only ā rounded, single filer, standard deduction, no other income, no retirement contributions or planning applied. Your actual result depends on filing status, deductions, state, and elections. The point isn't the precise number; it's that a quarter to a third of a good year goes to tax before any planning happens.
Nothing is withheld ā the liability is silent
The brokerage that pays you sends the gross amount and files Form 1099-NEC with the IRS in January. There is no withholding, no reminder, and no forced savings. The tax accrues invisibly as you earn, then arrives as quarterly estimated payment obligations ā miss those and underpayment penalties accrue on top. A disciplined per-commission set-aside is the difference between an ordinary April and a painful one.
What reduces the bill
- Legitimate business expenses ā marketing, licensing, E&O insurance, vehicle use, home office ā reduce net income before both tax layers.
- The QBI deduction ā generally up to 20% of qualified business income, subject to income-based limits ā reduces the income-tax layer.
- Retirement contributions ā a solo 401(k) or SEP moves substantial income out of the current year's income-tax base.
- Entity structure ā the S Corp election converts part of the SE-tax layer into untaxed distributions, which is why it's the cornerstone move for established brokers. Structure, payroll, estimates, and the annual return are what we run end-to-end in S Corp Management.
