Withholding Tax on Commission-Based Employees: Combining Regular and Supplementary Compensation

Commission is not a separate, specially taxed category of pay — it is “supplementary compensation” under BIR rules, and it must be combined with an employee’s regular salary for the same payroll period before withholding tax is computed. Employers who tax commission on its own, apart from that period’s basic pay, routinely under-withhold, because doing so effectively lets a monthly tax-exempt threshold apply twice instead of once. This trips up direct-selling companies, real estate developers, insurance companies, and car dealerships — anywhere sales staff are actual employees, not independent contractors.

This guide covers commission-based and other irregular-pay employees specifically. For the base withholding tax table itself, see How to Compute Withholding Tax Using the BIR Withholding Tax Table; for how the full year reconciles once the last commission run is in, see Year-End Withholding Tax Adjustment. If the commission earner in question is not your employee but an independent broker or agent, see BIR Form 2307 for Commissions and Brokers instead — that’s a different withholding regime entirely.

What counts as “regular” versus “supplementary” compensation? #

Regular compensation is the fixed amount an employee is entitled to every payroll period — basic salary and fixed allowances — while supplementary compensation is variable pay layered on top of it, paid with or without regard to a fixed payroll schedule. The distinction matters because it determines how the two amounts get taxed together, not whether either is taxable at all — both are.

Section 2.78.1(A) of Revenue Regulations (RR) No. 2-98, as amended, defines regular compensation as including “basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period.” Supplementary compensation covers “payments to an employee in addition to the regular compensation,” a category that explicitly includes commissions, overtime pay, taxable retirement pay, taxable bonuses, and other taxable benefits, whether or not they are paid on a fixed schedule.

A car dealership sales employee earning a modest ₱18,000 monthly base plus a commission that swings from ₱5,000 to ₱80,000 depending on units sold is the textbook case: the base is regular compensation, the commission is supplementary — and both belong in the same withholding computation for the month they’re paid.

Why can’t commission just be taxed on its own? #

BIR rules require the withholding computation to include both regular and supplementary compensation for the same period together, “as far as practicable” — not compute tax on the commission by itself as if it were a separate paycheck. The reason is structural: the BIR withholding tax table has a tax-exempt floor at the bottom of every period (currently the first ₱20,833 a month is at 0% under RR No. 11-2018’s Annex E). If an employer applies that exempt floor separately to the regular salary and then again to the commission, the same exemption effectively gets used twice in one month — which is not how the table is meant to work.

Regulatory guidance on this point states:

“The determination of the withholding tax should, as far as practicable, be applied to both regular taxable compensation income and supplementary compensation income for the payroll period concerned.”

In practice this means: total the employee’s regular and supplementary compensation for the payroll period first, deduct mandatory contributions and any exempt de minimis items, and only then apply the appropriate bracket from the withholding tax table — once, to the combined figure.

Worked example: a car sales employee’s commission payout #

A sales employee earning ₱18,000 basic monthly salary closes a strong month and earns a ₱42,000 commission, paid in the same payroll run — the numbers below show what happens when a payroll clerk taxes the two amounts separately versus combined, correctly, as one figure.

Taxing the two amounts separately under-withholds this employee by ₱3,420 in a single payroll period — because the ₱17,100 in regular pay, which alone sits under the exempt floor, quietly escapes tax entirely instead of being pushed, together with the commission, into the 20% bracket where the combined total actually lands. Multiply that gap across every high-commission month in the year and the employee arrives at the December year-end adjustment carrying a real deficiency that has to be collected in one lump sum — the exact mechanic covered in Year-End Withholding Tax Adjustment.

What if commission is the employee’s main or only pay? #

The same rule applies whether the fixed base is large, small, or nonexistent — the withholding table is applied to whatever total compensation the employee actually receives for the period, not to a category of pay. A purely commission-based employee with no fixed base still has each period’s total commission run through the applicable withholding bracket for that pay frequency. There is no separate “commission withholding table” and no reduced rate simply because the income is variable — the only thing that changes month to month is which bracket the total lands in.

This is also where employers most often mis-file: reporting commission income through BIR Form 2307 and expanded withholding tax, as if the recipient were an independent agent, when the person is actually a company employee on payroll. That distinction is about the employment relationship, not the payment method — an employee’s commission always runs through compensation withholding and BIR Form 1601-C, never BIR Form 2307.

Frequently asked questions #

Is an employee’s sales commission subject to withholding tax? #

Yes. Commission paid to an employee is taxable supplementary compensation under Section 2.78.1(A) of Revenue Regulations No. 2-98, as amended, and must be combined with the employee’s regular compensation for the same payroll period before withholding tax is computed — it is not a separate, lower-taxed category of pay.

What is the difference between regular and supplementary compensation for withholding purposes? #

Regular compensation is basic salary and fixed allowances paid at a set rate every payroll period. Supplementary compensation is variable pay on top of that — commissions, overtime pay, taxable bonuses, and similar amounts — paid with or without regard to a fixed payroll period. Both are combined into one taxable total before the BIR withholding tax table is applied.

Can an employer withhold tax on commission separately from basic salary? #

No. BIR rules require that the withholding tax determination include both regular and supplementary compensation income for the same period, as far as practicable. Computing tax on commission on its own, apart from that period’s basic salary, typically under-withholds because it lets the same monthly exempt threshold apply twice instead of once.

Does a purely commission-based employee (no fixed salary) still get withholding tax computed the same way? #

Yes. Whether an employee earns a small fixed base plus commission, or commission alone, the total compensation actually paid for the period — regardless of the mix — is what gets run through the withholding tax table for that payroll frequency. There is no separate, lower withholding regime just because the pay is commission-based.

Is a company’s commission-based salesperson an employee or an independent contractor for tax purposes? #

That depends on the actual relationship, not the payment structure. An individual under the company’s control, on its payroll, and receiving compensation reported through BIR Form 2316 is an employee subject to withholding tax on compensation. An independent sales agent or broker who is not an employee is instead subject to expanded withholding tax and receives BIR Form 2307 — see BIR Form 2307 for Commissions and Brokers for that separate scenario.

Summary #

Commission, sales incentives, and other variable pay given to employees are supplementary compensation under RR No. 2-98 — taxable, but only correctly taxed when combined with that period’s regular compensation before the withholding tax table is applied, per the “as far as practicable” combination rule. Taxing commission on its own is a common, quiet source of under-withholding that surfaces as a deficiency at year-end. For the bracket table itself, see How to Compute Withholding Tax Using the BIR Withholding Tax Table; for how any shortfall gets corrected before BIR Form 2316 is issued, see Year-End Withholding Tax Adjustment.