Self-employment tax is owed on your commission income only when you're an independent contractor. This is the tax comprising Social Security and Medicare taxes paid by people who work for themselves. There's no self-employment tax owed on your commissions earned when you have employee status because your employer is responsible for withholding and paying Social Security and Medicare taxes.
Regular employees receive a Form W-2 annually indicating your gross compensation and taxes withheld. Remitting these taxes is your employer's responsibility even if they are not withheld. Regular employees do not pay self-employment tax. Payment of compensation as commissions does not relieve employers of their responsibility for deducting contributions to Social Security and Medicare from your pay.
If you're an independent contractor, you are self-employed and your earnings are subject to self-employment tax. Normally, any source that paid you a commission as an independent contractor sends you a Form 1099 annually stating the amount you received.
Independent contractors are basically defined as individuals who are assigned specific tasks to accomplish and work without direct supervision. The form of compensation — whether commissions or wages — is irrelevant.
Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons and certain home-based workers. When you're paid as a "statutory employee," your commissions are reported on a Form W-2 with a check mark in Box 13. You report this income and deduct business expenses just like an independent contractor.
However, you don't owe self-employment tax as a statutory employee. Instead, your employer is responsible for withholding your share of Social Security and Medicare taxes from your pay.
The self-employment tax is payable when your net earnings from independent contractor self-employment total $400 or more per year. Since the tax is determined from net profit, you are entitled to reduce commissions as an independent contractor by tax-deductible expenses. All of your ordinary and necessary business expenses are subtracted from commissions you received as an independent contractor. Self-employment tax is owed only if your resulting net income exceeds $400.