How to Pay Sales Commissions

Starting a business and hiring employees comes with many challenges. If you’re hiring salespeople and planning to create a commission structure, there are a handful of key issues to consider, including how and when to pay the commissions. 

This guide details all you need to know to pay sales commissions the right way for your business.   

Your Commission Structure

The most common commission structure is a percentage of the revenue from the sale. You could also choose to pay a flat fee for a sale, or for a certain number of sales. You’ll need to determine how much your business can afford to pay so that you’re still left with a healthy profit margin. 

However, the goal of paying commission is to motivate your employees to close sales, so you want to make the amount enough of an incentive for them to work hard.

Calculating Commissions

If you pay a percentage of revenue, you’ll simply take the amount earned by your company from the sale multiplied by the percentage you’ve chosen to pay. 

For example, if your percentage is 6% and Jane makes a sale of $500, the commission is:

$500 x 6% = $30 

If you decide to pay a flat fee per sale of $25, you’ll just pay Jane $25.

Determine Commission Payment Schedule

You’ll need to decide how often you want to pay out your employees’ commissions. You can elect to pay them every pay period or monthly. Some states have rules about how often you must pay commissions, so check with your state for requirements.

How to Pay Sales Commissions

Once you’ve decided on your commission structure and schedule, you need to get the money into the hands of your employees. You can add the commission to their gross base pay, or you can choose to pay the commissions as a separate payment. 

For example, if you pay Jane a bi-weekly fixed payment of $1,000, you could simply add her $30 commission to her base pay and pay her $1,030 on her regular payday. Alternatively, you could choose to pay all commissions separately on the last day of the month.

Either way, you’ll still need to make the appropriate mandatory deductions from the commission amount paid, including income taxes and FICA taxes. 

You’ll also need to set up some sort of tracking system for commissions, so you’ll know how much your business is liable for at any given time. You can do this in a spreadsheet or in accounting software.

Using a Payroll Service

Processing payroll, whether you pay commissions or not, can be quite complex, so you might want to consider using a payroll service. It’s likely to be less expensive than creating a new staff position for managing payroll. 

Payroll and payroll taxes come with countless laws and restrictions, and a payroll service can ensure your business remains in compliance at the federal, state, and local levels. You’ll just send over your digital timesheets and relevant information and the service provider will take care of the calculations, payments and taxes, freeing you up to focus on growing your business. 

We highly recommend hiring a payroll service — as a busy entrepreneur, you won’t regret it!