Considerations for Payrolling Commissioned Employees

For businesses with sales-focused roles, where employees often receive commissions, efficient payroll processing is essential. To streamline this process, selecting appropriate payroll software becomes critical, particularly for those new to handling commission-based payroll. Commissions are typically a percentage of total sales, creating complexity when combined with base salaries.

Example:

Imagine a sales employee with a 15% commission rate on a $10,000 sale. Using the formula (Total Amount Sold x Commission Percentage), the gross pay for this sale is $1,500 (10,000 x 0.15 = 1,500).

Base Salary:

An inverse relationship often exists between commission rates and base salaries. For instance, Salesperson A has a $1,500 base salary and a 4% commission, resulting in a gross pay of $3,300 for a $45,000 sale. Salesperson B, with no base salary but a 10% commission, achieves a gross pay of $4,500 for the same sale.

Commission Levels:

Some businesses opt for graduated commission scales, offering higher rates for higher sales. For instance, the first $10,000 in sales might yield a 5% commission, the next $20,000 a 7% commission, and anything over $30,000 a 10% commission. Then, assuming Salesperson C sells $80,000, the gross pay calculation using this scale would be ($10,000 x 0.05) + ($20,000 x 0.07) + ($50,000 x 0.10) = $6,900.

Base Salary Plus Tips:

In industries like restaurants, a base salary plus tips model is common. Tips are reported to the IRS, and the employee's gross taxable wages are calculated by adding the base wage to the tips.

Taxation:

Commissions on sales are subject to federal income tax withholding, social security, Medicare, and FUTA taxes. Special rules apply to statutory employees in the life insurance sales field.

Understanding these calculations is crucial for accurate payroll processing. Using a reliable payroll software, such as AAB Payroll, can automate these computations and ensure efficiency. For a personalized demo on how AAB Payroll can benefit your commissioned employees, request more information.