Commission pay is a flexible and highly lucrative form of compensation that’s suitable for sales, finance, and even real estate jobs. It entails a distinct performance evaluation and payout structure, making it a must to know how to prepare a commission pay stub.

But to understand how to incorporate commissions and incentives in paycheck stubs, independent contractors and employers must also broaden their existing knowledge on what a commission-based income is all about, its pros and cons, and different classifications.

We’ll cover all the information in this article, so keep reading to learn more.

Let’s begin!

Key Takeaways

• Commission pay is given to employees who make a living either by earning commissions alongside their base salaries or by generating a purely incentive-based income.
• It is essential to choose a suitable pay stub template and input accurate and complete values to reflect the correct data in a commission pay stub.
• The five most commonly used types of commission pay include salary plus commission pay, straight commission, variable commission, bonus commission, and residual commission.
• Negotiating commission rates will depend on the employee’s skill, level of expertise, and overall earning potential.

What is Commission Pay?

Commission pay is a type of monetary incentive paid to employees working in the retail, sales, real estate, and recruitment industries.

A typical example of this is how sales personnel are paid an additional percentage on top of their income after they have met a specific sales goal or metric. This is otherwise known as flat commission.

Unlike a fixed salary, where earnings are determined by set hourly or daily rates, commissions are not bound by fixed rates and therefore enable more flexible and lucrative income potential.

Commissions are earned either as a combination of an employee’s base compensation plus commission or as an added bonus. Businesses use commission pay to reward employee performance. Alternatively, with a purely commission-based salary, employees have more freedom to boost their daily earnings.

How Does the Commission Pay Work?

Since commissions are synonymous with limitless earning potential, the important question is: how does commission-based pay work? There are varying factors to consider in assessing how to implement commissions, allowances, or bonuses.

Employers typically prepare a set of key performance indicators (KPI) when determining commission percentages. For instance, Jenny, a lead generation specialist at a marketing agency, has to bring in at least five new prospects every month to qualify for a 3.5% bonus.

Another benchmark used to measure allowances and commissions is the number of sales or successful upsells per transaction. Let’s say Mark is entitled to a 10% commission every time he closes a sale worth over $500. On top of that, he also gets an additional 5% for every successful upsell.

One day, Mark was able to sell $600 worth of retail products and even upsell additional items worth $250. Since Mark made a total of $850 in sales, he is entitled to a 15% incentive.

For employees who are paid through a base salary plus commission, their earnings may comprise 50-50 commissions and base salary, or 40% commission and 60% fixed rates.

The proportions may vary based on the nature of the job, the competition in the market, or the company’s target revenue.

How to Add Commission to Your Pay Stub

Since bonuses and incentives are unlike regular wages and salaries, there are specific steps in preparing a commission pay stub.

Here’s how to add commission-based earnings to your pay stub using our paystub generator:

Step #1. Choose a Template

Take your pick from our selection of six professional-looking commission pay stub templates. Each of our templates is meticulously designed to suit different business and branding requirements.

Step #2. Add Employer and Employee Data

Input your employer and employee information. Make sure you fill in the blank fields with the correct information.

Step #3. Add Earnings and Commission

Fill in the form with the base salary and the commission or bonus earned by your employee in a given pay period. Our commission pay stub generator comes with a calculator, making it easier to consistently have correct and accurate values in your commission pay stub.

Step #4. Review Your Pay stub

Take time to review all the information you’ve inputted into your pay stub to see whether you missed an important field or provided the correct earnings and commission values.

Step #5. Download

If you’re satisfied with your pay stub, download a copy and save it.

Did we mention that you can generate more than one commission pay stub with our generator? That’s right, create as many as you need without breaking a sweat!

Types of Commission Pays

Some of the most common commission pay examples are:

#1. Salary + Commission

A fixed salary combined with a set commission is the most widely used form of commission pay. It is also the easiest to input into a commission pay stub. In this setup, the salary rates are barely enough to provide a stable income source, and so the commission pay is meant to compensate for the low wages.

Contrastingly, the base salary is meant to provide a ‘safety net’ for when sales take a downward trajectory. Some employers use a fixed salary amount, while others apply hourly rates for the base compensation.

Sales and retail jobs usually adopt salary plus commission compensation because it effectively strikes a balance between investing in employees regardless of how well they meet the commission metrics and pushing employees to concentrate on honing their skills to hit the sales goal.

#2. Straight Commission

Straight commission is a purely commission-based way of generating income. It does not have a fixed salary to serve as a security blanket whenever sales are low.

The commission is fairly high in this structure since it is not paired with any other form of compensation. A person who makes money through straight or 100% commission is considered an independent contractor and therefore does not require the use of a commission pay stub but a dedicated independent contractor paystub.

From the employer’s perspective, they are not obligated to cover a contractor’s benefits, taxes, and allowances. In short, hiring independent contractors to do a purely commission-based job means cutting down on employment costs.

Some individuals thrive well in the non-committal and potentially high-reward structure of earning a straight commission. Others may feel too pressured to keep up with the target metrics and end up switching to jobs with a fixed and more stable rate.

#3. Variable Commission

Otherwise known as variable pay, variable commission involves paying performance-based bonuses to employees. It is a type of incentive often used in the sales industry.

In determining variable commission rates, employers can either use a flat rate or a tiered commission plan. A flat-rate commission takes an employee’s completion quota percentage into consideration to ensure the set amount justifies the performance.

If an employer uses a tiered commission plan, employees are subject to receiving higher bonuses and commissions as they continuously exhibit stellar performance and exceed their accomplishments while they’re at it.

For example, a sales associate starts with a 10% incentive for every $50,000 worth of generated sales and ends up with a 30% commission if they showcase consistently good performance and deliver more than twice the sales objective.

#4. Bonus Commission

If an employee has a bonus commission declared on their commission pay stub, that means their bonus is based on the total revenue they have generated in a given period. This type of commission is taken from a portion of the company’s total profit.

An example of how bonus commission works is when a sales representative earns a bonus commission for selling over 500 computer units or is granted $30,000 in commission for closing an exclusive and large-scale deal.

#5. Residual Commission

Out of all the different types of commission pays, residual commission stands out because it entails a continuous revenue source for employees. Residual commissions are given when an employee acquires a high-profile client or closes an exclusive deal for the company.

That said, they may earn a recurring amount every payday from a client or account.

Advantages & Disadvantages of Commission Pay

The following are the advantages and disadvantages of earning commission-based income:

Advantages

Flexible earnings. Sales representatives who are extremely good at what they do are capable of increasing their commissions at a steady and consistent rate. Individuals who are adaptable and able to hone their skills while working under pressure will also thrive on a commission-based income.

Performance-based. Commissions are directly tied to each employee’s individual performance. That means their earnings are proportionate to the effort and hard work they’ve invested to meet their KPIs. In contrast, a fixed salary rate has a tendency to overlook differences in performance and is mostly focused on the number of hours completed in a pay period.

Disadvantages

Complicated tax filing. Withholding taxes on commission depends on whether an individual is a regular employee of a company or works as an independent contractor. The amount withheld from a regular employee’s commission is based on their Form W-4, while an independent contractor’s tax contributions are reported on their Form 1099-MISC.

At the same time, if the commission is paid separately from an employee’s base salary, employers must assess whether to use the aggregate or percentage method to determine the amount to withhold from the commission.

The aggregate method combines the base pay and commission rates and imposes regular income tax rates on the consolidated amount. The percentage method deducts a fixed 22% from commissions.

High demand, low rewards. The pressure of earning money through commissions is not something that anyone can handle. Specifically, sales is a skill that requires grit, active listening skills, tenacity, and flexibility.

Without these core competencies, it would be impossible for a sales rep to meet their quota or bring in measurable results. A 100% commission-based pay setup is also not ideal for individuals who need a stable and fixed income to pay for their basic needs.

Can Commission Be Negotiated?

The short answer is yes; commissions are open for negotiation. At best, employers should discuss and explore a suitable commission rate with their employees or independent contractors.

A sales representative or real estate broker with years of experience in their respective field is more entitled to set a starting rate that fits their level of expertise. Conversely, employees with a fairly competent skill level typically bargain for a higher bonus or commission percentage the more deals they close and sales they make.

Employees or independent contractors earning residual commission can be entitled to a higher bonus if they upsell a client’s existing subscription to a more expensive plan or entice customers to extend their contract and purchase more items from the business.

Final Thoughts

To summarize, commission-based income boils down to skill, improvement, and the earning potential that one can bring to the table.

In response, a commission pay stub is meant to enumerate performance-based bonuses and earnings. While it may be relatively easy to reflect commissions on a regular pay stub, determining the ideal percentages and suitable timing for negotiating rates is tricky and requires careful consideration.

Alternatively, you can also take the practical route and use our paystub generator, which enables you to quickly produce many pay stubs and minimize errors in calculating your employees’ gross and net earnings.