What is commission pay?

A commission is one of many ways to earn income, usually for doing a job selling goods or services.

An employer may pay an employee or independent contractor a sales commission instead of a salary. But some employers may pay a salary plus commission as an incentive to increase sales.

Employers are not required to pay commission under the Fair Labor Standards Act, according to the U.S. Department of Labor.

Understanding the pay structure may help you decide whether a commission or salary is better for you.

Key takeaways

• A commission is one form of payment for doing a job.

• Commission pay is common for employees who sell goods or services.

• The commission rate typically is a percentage or dollar amount of the sales you make.

• There are many different commission pay structures and formulas.

• Commission pay typically provides an incentive for employees to sell more in order to earn more.

A sales commission is the income some employers pay employees to sell goods and services. 

The basic concept of a commission is the same no matter what job you do. But depending on the profession, the details of how, when and how much you’re paid could vary. 

With a commission, there’s usually an incentive to sell more so you make more money. Some employers have sales goals or even sales quotas. Others give bonuses for exceeding those marks. 

Employers typically base their commission rate on one of two things:

• A fixed dollar amount for each sale or transaction

• A percentage of the sale or profit amount   

Many occupations pay commission. A few common commission-based jobs include:

• Realtor

• Recruiter

• Retail store clerk

• Car salesperson

• Insurance agent

• Loan officer

• Stockbroker

A salary and a commission are both ways to get paid for doing your job. The differences include how and when your employer pays you for the sales or services you perform.

A salary is a set amount of money you make for the year, usually for providing a service. The payments typically are spread out. Common pay periods include once a week or once or twice a month. To compare compensation plans, you can calculate your salary as an hourly rate. For example, if you make $70,000 a year as a retail store manager, you could be paid $2,692 every two weeks, minus taxes and benefits.

A commission is the amount of money you make—usually for selling goods or services—and is typically either a percentage or a fixed amount of the sales you make. Think of a salesperson, for example. A salesperson may earn 10% commission on all the products they sell.

There are many different types of commission. Among the most common are:

1. Salary plus commission

2. Straight commission

3. Draw against commission

4. Residual commission

5. Graduated commission

6. Bonus commission

7. Variable commission

Read on to take a closer look at the different types of commission.

Salary plus commission is exactly what it sounds like. An employer may pay an employee a fixed annual income as a base salary. But they also pay a commission on all sales. 

Salary-to-commission ratios usually range from 50-50 to 60-40 to 80-20. That means your income could be 50% to 80% salary and 20% to 50% commission.

Straight commission means 100% of your income comes from commission—there’s no salary.

Straight commission is common among real estate agents, for example, who get a percentage of the home sale price.

A fixed amount of money paid in advance is called a “draw” or “guarantee” against commission. 

Basically, if you sell more than the draw, employers typically pay the extra amount at some point in time. But if you sell less than the draw, employers may expect you to return the draw. 

A residual commission can be paid after a continuing client makes their first purchase. It can be an ongoing amount of money you make as your client continues to spend money with your company. 

Unlike commission on one-time sales, a residual commission benefits people with ongoing or repeat clients or accounts.

Residual commissions are common for consultants, real estate agents and homeowners insurance agents.

A graduated commission rewards high-performing sales representatives. That’s because their commission rate increases as their sales volume increases. 

Employers can create tiers, levels or categories of sales. Each step up the ladder has a higher commission rate for a higher volume of sales.

Bonus commission is extra money an employer might pay employees who sell more than a set quota. 

Bonuses could be based on the performance of an individual. Or they could be based on the entire company. Or they could be anything in between, such as a team, department or region.

Employers may pay a bonus after a project is completed. Or they may pay at different times, perhaps once a month, quarter or year.

Variable commission rates can change depending on a variety of factors. Some of the variables can include the client, the product or the sales volume.

Businesses that want to land certain clients or hit certain sales goals may use variable commissions.

Companies can calculate commission based on a simple formula—with some variations. Basically, your commission generally equals your sales multiplied by your commission rate, minus any draw or guarantee that was paid in advance.

Employers may calculate commission at any time interval based on when you made the sale: daily, weekly, biweekly, semimonthly, monthly or annually.

Some companies may be willing to negotiate your commission rate.

It probably won’t be as easy as simply asking for what you want. Doing your homework and preparing a strategy could help you successfully negotiate your commission. 

Here are some suggestions:

• Research the average commission rate for your role, industry and location. Then factor in your skills, experience and achievements.

• Understand what your employer expects from you. Then compare your sales volume and your potential to improve your performance.

• Be prepared to discuss your sales history, customer feedback and knowledge of market data and industry trends.

• Anticipate what your boss might say. Have a good answer for any potential objections or counteroffers.

• Choose the right time and place for a formal conversation. That could be when you’re first hired, during a regular job performance review or if you’re weighing a different job offer.

Companies may pay commission at any interval. Monthly, quarterly and annual pay periods are common. 

Sometimes, the pay period is based on when the commission is made. And certain conditions may apply.

For example, a recruiter may get their commission only after the employee they placed has been with the company a certain number of months. Or a real estate agent who sells a home may get their commission when the company receives the closing costs—not when the contract is signed.

The IRS and state and local governments may expect you to pay income taxes on all commissions. That includes any supplemental income not reported on your W-2 or 1099-MISC form. 

Employers can withhold tax on commission when processing payroll.

A commission is a form of payment for doing a job—usually sales. The commission rate can be based on a percentage or dollar amount of sales. Basically, your commission is your sales multiplied by your commission rate.

When considering a new job, it’s important to understand the difference between being paid a salary and a commission.