How sales commission works
A commission is the variable part of pay that rewards a salesperson for the revenue they bring in. The simplest plan pays a flat percentage of sales. Many companies use tiered (or accelerated) plans instead: a base rate up to a quota, then a higher rate on everything above it, so the best performers earn more on each extra dollar. This calculator handles both, adds your base salary and shows how much of your pay depends on results.
The formulas
- Flat rate: commission = sales × rate
- Two tiers: commission = min(sales, threshold) × rate 1 + max(sales − threshold, 0) × rate 2
- Total pay = base salary + commission
- Effective rate = commission ÷ sales
Set the threshold to 0 to use a single flat rate. The second rate applies only to the portion of sales above the threshold, not to the whole amount: crossing the quota never makes the first dollars pay more.
Worked example
A rep earns a $3,000 monthly base, 5% on the first $40,000 of sales and 8% above that. This month they sold $50,000.
- First tier: $40,000 × 5% = $2,000.
- Second tier: $10,000 × 8% = $800.
- Commission: $2,000 + $800 = $2,800, an effective rate of 5.6%.
- Total pay: $3,000 + $2,800 = $5,800, of which 48% is variable.
The table under the calculator shows the commission and total pay at other sales levels, which is a quick way to see how much a bigger month is worth.
Typical commission structures
| Field | Common structure |
|---|---|
| Real estate | 5–6% of the sale price, split between agents and brokers |
| Car sales | 20–30% of the dealer’s gross profit on the vehicle |
| B2B software | About 10% of first-year contract value, with accelerators above quota |
| Retail | Hourly wage plus 1–5% of sales |
| Insurance | Higher first-year rate, then smaller renewal commissions |
Things to check in a commission plan
- Gross or net: is the rate applied to revenue, to gross profit or to collected cash? A plan paid on profit is worth much less than the same percentage of revenue.
- Draws: a draw against commission is an advance that is deducted from future commissions, not extra pay.
- Clawbacks: commissions can be reversed if a customer cancels or does not pay.
- Caps and timing: some plans cap earnings or pay quarterly.
Taxes
Commission is ordinary wage income, subject to income tax, Social Security and Medicare. Employers often withhold federal tax on it as supplemental wages at a flat 22%, which can look high on a big check, but the final amount is settled on your annual return. Use the salary calculator to estimate take-home pay.