Payroll Procedures for Commissioned Employees
Commission is a sum of money an employee receives for performing a certain task. This sum is typically a percentage of sales made. While some employees receive only commission, others are paid a commission plus a salary or hourly wage. In some cases, a commissioned employee is exempt from overtime. There's also withholding, paid sick leave and the last paycheck to consider. Let's examine all of these components.
With a commission-only pay structure, payment is based on the agreed-upon commission percentage or rate. For example, a salesperson who sells $40,000 in products per month, with a commission of 10 percent, would receive $4,000 in commission for that month.
Some establishments use a graduated commission scale, such as:
- Commission of 6 percent for the first $20,000 in sales.
- Commission of 8 percent for the next $35,000 in sales.
- Commission of 10 percent for all sales over $35,000.
Commission + Salary or Hourly Wage
Some employees receive a predetermined, or base, salary in addition to commission. If the employee is exempt-salary, he or she must receive no less than the minimum salary requirement under the FLSA or applicable state law — in addition to his or her commission.
Similarly, commissioned, hourly employees must be paid at least the federal or state minimum hourly wage, whichever is more, plus their commission.
Commissioned employees who are exempt from the FLSA's overtime pay provisions do not have to be paid overtime if they work more than 40 hours in a week. This includes salaried employees and outside salespersons who perform the FLSA-mandated job duties necessary for exempt status. Note that the FLSA does not have salary or minimum wage requirements for exempt outside salespersons — these employees can be paid on a commission-only basis.
Additionally, commissioned employees in retail establishments are exempt from overtime if they meet certain conditions of the FLSA. One requirement is that over half of the employee's total earnings in a specific period must constitute commissions.
If the commissioned employee is not exempt from overtime, he or she must receive overtime pay for work hours exceeding 40 in a week. Both the commission and the regular wages earned for the week must be factored in when computing overtime.
Commissions paid to an employee are considered wages, and they are generally subject to federal and applicable state employment taxes, including federal income tax, Social Security tax and Medicare tax. Employers must pay their own share of taxes on commissions as well. When paid in addition to regular salary or hourly wages, commissions are considered supplemental wages, in which case, special withholding rules may apply.
Paid Sick Leave and Final Wages
In states that mandate paid sick leave, commissioned employees may need to be paid for sick leave, regardless of whether they are paid fully or partially by commission. Also, when a commissioned employee terminates, it is important to check state law for any rules that might apply to handling the final paycheck.