Commission

Commission is triggered by specific transactions or measurable outputs : calculated formulaically per transaction or per dollar of value generated.

Commission is variable compensation paid to a worker based on the value of specific transactions, deals, or measurable outputs, typically calculated as a percentage of transaction value or a fixed amount per transaction, used across sales, real estate, insurance, recruiting, and financial services.

Commission vs bonus vs base salary

Commission structure types

• Straight commission. 100% commission, no base salary. Common in real estate and some insurance roles. High ceiling, no downside protection. FLSA minimum wage rules still apply.
• Base salary plus commission. Most common modern structure. Typical splits 50/50 to 70/30 base to variable.
• Tiered commission. Commission rate increases as cumulative performance grows. Example: 5% on first $100K, 7% on $100K-$200K, 10% above $200K.
• Draw against commission. Worker receives regular ‘draw’ as advance against future commissions; reconciled periodically. Recoverable (paid back if commissions don’t materialise) or non-recoverable (effectively a minimum guarantee).
• Residual commission. Ongoing commission on recurring revenue (insurance renewals, SaaS subscriptions, AUM-based financial services).
• Gross margin commission. Commission calculated on profit margin rather than revenue. Discourages excessive discounting.
• Spiffs. Additional commission for specific products, periods, or campaigns. Tactical motivator on top of standard structure.
• Team or pool commission. Commission distributed across a team based on collective performance.

Industries that use commission beyond sales

• Real estate. Agents typically earn 100% commission on property transactions, split with brokerages (commonly 60/40 or 70/30).
• Insurance. Brokers and agents earn commission on policies sold, often with residual commissions on renewals.
• Recruiting agencies. Contingent and retained recruiting earn placement fees (typically percentage of first-year compensation of placed candidates).
• Financial advisory. Advisors earn commission on assets under management (typically 1-2% annually), specific transactions, or both.
• Mortgage brokerage. Brokers earn commission on loan originations.
• Talent representation. Agents and managers earn commission on artist and athlete earnings (typically 10-20% of gross).
• Auto sales. Car salespeople typically commission-based on gross profit margin of each sale.
• Legal contingency arrangements. Plaintiffs’ attorneys paid percentage of settlement / award, commission in functional terms.

FLSA and tax considerations

FLSA minimum wage requirements

Tax treatment

• US federal: supplemental wages. IRS treats commissions as supplemental wages, withheld at flat 22% if paid separately from regular wages.
• State income tax. Treated as supplemental wages in most states; withholding rates vary.
• Self-employment. Commission earned as independent contractor reported on 1099; worker responsible for self-employment tax (15.3% on initial threshold).
• UK. Commission is taxable as employment income via PAYE; included in National Insurance Contributions.

Common commission compensation failures

• Unclear plan documentation. Commission disputes are among the most common pay-related disputes. Clear written plans prevent most disputes.
• Retroactive plan changes. Changing the plan after performance has been delivered creates legal exposure and damages trust.
• Late payments. Several states require commission payment within specific timeframes; violations expose employer to back wages, liquidated damages, and attorney’s fees.
• Minimum wage violations. Failure to true up commission earnings in low-volume periods; FLSA exposure.
• Misclassification. Treating workers as 1099 contractors when they should be W-2; significant tax and benefit exposure.
• Claw-backs without legal basis. Recovering paid commissions when deals cancel; must be specifically authorised in plan documentation; some states restrict.

See also Sales Commission for the specific sales context, Bonus for the comparison concept, Back Pay for unpaid commission recovery, and Benchmark Job for pay benchmarking context.

Frequently asked questions