Commission pay is compensation tied directly to results, most often a percentage of the sales an employee closes. It can make up a worker’s entire pay or sit on top of a base salary. The model is common in sales roles because it links earnings to performance and rewards the people who bring in revenue.
Commission pay rewards employees for what they produce rather than the time they put in. A salesperson who earns 5% on every deal makes more when they sell more, which aligns their personal incentive with the company’s revenue goals. Some workers earn commission only, while others receive a base salary plus commission, which steadies their income during slower periods.
As a performance-linked payment, commission works much like an incentive, but with a key difference: it is usually an ongoing structure built into how the role is paid, rather than a one-time reward for hitting a specific goal. That structural role is why commission plans are often spelled out in detail in an offer letter or a separate commission agreement.
Employers structure commissions in several common ways:
The commission agreement should define the rate, what counts as a qualifying sale, when commission is considered earned, and how disputes are handled. Vague plans are a frequent source of conflict, especially around deals that close late or get canceled.
Two features of commission plans deserve special attention because they directly affect take-home pay. A draw is essentially a loan against future commissions. A recoverable draw must be paid back from later commissions, while a non-recoverable draw acts more like a guaranteed minimum the worker keeps even in a weak period.
A clawback works in the opposite direction. It lets the employer recover commission that was already paid if the underlying deal falls apart, for instance when a customer cancels or never pays. Clawback terms vary widely, and a fair agreement makes clear exactly when and how a clawback can happen so the employee is not blindsided.
Commissions count as supplemental wages, so they follow the same withholding rules as a bonus. The employer can withhold at the flat 22% supplemental rate or use the aggregate method based on the W-4. Either way, the commission is also subject to Social Security and Medicare taxes.
Overtime can apply too. For non-exempt commissioned employees, the commission must be folded into the regular rate when calculating overtime, so it cannot be ignored just because the worker is paid on results. Certain retail and service roles fall under a specific FLSA commission exemption, but it has strict conditions that the employer must actually meet.
Jordan earns a $3,000 monthly base salary plus 4% commission on sales. In a strong month, Jordan closes $80,000 in sales, earning $3,200 in commission on top of the base, for $6,200 in gross pay. In a slow month with $20,000 in sales, the commission is only $800, so total gross pay is $3,800.
The base keeps income from dropping to zero, while the commission rewards stronger months before deductions reduce net pay. Over a full year, the variable portion can easily outweigh the base for a strong performer, which is exactly the outcome a well-designed commission plan is meant to encourage.
Commission pay is compensation based on results, usually a percentage of the sales an employee generates. It can be the entire pay or an addition to a base salary.
A draw is an advance the employer pays a commissioned worker against future commissions. The worker repays it from the commissions they later earn.
Commissions are supplemental wages. Employers can withhold at the flat 22% supplemental rate or combine them with regular wages and withhold based on the W-4.
A clawback lets an employer recover commission already paid when a deal falls through, such as a customer canceling or failing to pay. The terms are set in the commission agreement.
Non-exempt commissioned employees can be owed overtime, and their commission must be included in the regular rate. Some retail and service roles fall under a specific FLSA commission exemption.
