A commission is pay based on what you sell, usually a percentage of sales revenue. The math is simple for a flat rate. It gets more interesting with tiers, draws, and plans that combine a base salary with commission. Always read your written commission plan: it defines what counts as a sale, when commission is earned, and how returns are handled.
Flat-rate commission
Commission = sales × commission rate
$40,000 in sales at 6% earns $40,000 × 0.06 = $2,400. With a $2,500 base salary for the same period, total pay is $4,900.
Tiered commission
Tiered plans raise the rate as sales grow. Take this plan:
| Sales band | Rate |
|---|---|
| $0 to $10,000 | 5% |
| $10,000 to $25,000 | 7% |
| Over $25,000 | 10% |
There are two ways a plan can apply these rates to $30,000 in sales.
Marginal (each rate on its own band)
| Band | Sales in band | Rate | Commission |
|---|---|---|---|
| $0 to $10,000 | $10,000 | 5% | $500 |
| $10,000 to $25,000 | $15,000 | 7% | $1,050 |
| Over $25,000 | $5,000 | 10% | $500 |
| Total | $30,000 | $2,050 |
The effective rate is $2,050 ÷ $30,000 = 6.83%.
Retroactive (top rate on all sales)
Once you reach a tier, its rate applies to every dollar: $30,000 × 10% = $3,000.
The difference is large, so check which method your plan uses. Retroactive plans also create sharp jumps: one more sale across a threshold can raise the commission on everything before it.
Draw against commission
A draw is an advance paid each period, then subtracted from commission earned.
- Draw $2,000, commission earned $2,050: you receive the $2,050 in total, the $2,000 draw plus a $50 true-up.
- Draw $2,000, commission earned $1,500: you keep the $2,000, but there is a $500 shortfall. Under a recoverable draw, it is usually carried forward and taken out of future commissions. Under a non-recoverable draw, it is not.
Commission and overtime
For nonexempt employees, commissions generally count toward the regular rate used for overtime. The Department of Labor’s regular-rate fact sheet notes that pay may be based on commission or other measures, and overtime is computed from the average hourly rate derived from those earnings. Our guide on how overtime pay is calculated shows the method with a bonus; commissions work the same way.
Commission is gross pay
Commissions are taxed as wages, and the amounts above are before any deductions. To see a commission paycheck alongside hourly or salary pay, use the gross pay calculator.
Tools
- Commission calculator: flat, marginal tiered, or retroactive tiered plans with base pay, plus the sales needed to hit a target.
Sources
About this guide. Written for US employees as general information, not legal or tax advice. Rules can differ by state, employer, and contract. See our methodology and disclaimer.