How to calculate sales commission: flat, tiered, margin and draws

The basic commission formula

Every commission plan starts with the same sum: the amount the plan pays on, multiplied by a rate. If you sell $40,000 in a month at 5%, you earn $40,000 × 5 ÷ 100 = $2,000.

Before you calculate anything, check two things in your plan document. First, what counts as a sale: revenue invoiced, cash collected, or gross profit. Second, the period: commission is usually worked out per month or per quarter, and tier thresholds reset at the start of each one.

Commission is normally calculated on the sale price before sales tax or VAT, and after any discounts and refunds. If a customer returns goods, many plans take back the commission paid on that sale, often called a clawback.

Commission = Sales × Rate ÷ 100 Effective rate = Commission ÷ Sales × 100

Tiered commission: marginal vs whole-amount

A tiered, or graduated, plan pays a higher rate as sales grow. There are two ways to apply the tiers, and they give very different pay for the same month.

In a marginal plan, each rate applies only to the sales inside its band, the way income tax brackets work. In a whole-amount plan, sometimes called a step or retroactive plan, once you pass a threshold the higher rate applies to every dollar you sold in the period.

The table uses the same four tiers as our calculator: 3% up to $25,000, 5% from $25,000 to $50,000, 7% from $50,000 to $100,000 and 10% above $100,000.

• Under the whole-amount method, one more dollar of sales at $49,999 adds $1,000 of commission. That cliff tempts reps to hold back or pull forward deals around month end.
• Under the marginal method, pay rises smoothly and crossing a threshold never lowers what you earned on earlier sales.
• Our calculator uses the marginal method in tiered mode. For a whole-amount plan, use flat rate mode with the rate for the tier you reached.

Worked example: a marginal tiered month

A rep at a commercial cleaning supplier sells $62,000 in a month. The plan has a $2,000 monthly base and the four tiers above, applied marginally.

• The rep’s next sale earns 7%, even though the average across the month is 4.58%.
• If the same tiers were applied to the whole amount, the month would pay $62,000 × 7% = $4,340 in commission, $1,500 more.

Base plus commission

Many roles pay a fixed base salary plus a lower commission rate. The base gives steady income in slow months; the commission keeps the incentive to sell. To compare plans, work out total pay at a few realistic sales levels, using the base for the same period as the sales.

Here Plan A pays 8% commission only, and Plan B pays a $2,500 monthly base plus 4%. The two cross where $2,500 equals the 4% difference in rate: $2,500 ÷ 4% = $62,500 of monthly sales.

Total pay = Base pay + Commission Sales where two plans pay the same = (Base B − Base A) ÷ (Rate A − Rate B)

Commission on gross profit vs revenue

Paying on revenue is simple, but it pays the same for a sale at full price and a sale discounted to almost nothing. If reps can set prices or discounts, paying on gross profit (sale price minus the cost of what was sold) ties their pay to what the business actually keeps.

Gross profit rates are higher than revenue rates because the base is smaller. In the example, two deals each bring in $20,000 of revenue, but one keeps $8,000 of gross profit and the other only $3,000 after a heavy discount.

• On revenue, the rep is paid the same for both deals, so a discount costs them nothing.
• On gross profit, the discount cost the rep $1,250, which makes them think twice before offering it.
• Gross profit plans need reps to trust the cost figures, so share how cost is calculated.

Commission on margin = (Sale price − Cost of goods sold) × Rate ÷ 100

Draws against commission

A draw is a regular payment made in advance of commission, often used for new reps or long sales cycles. Each period, the commission earned is set against the draw.

With a recoverable draw, any shortfall is carried forward as a balance the rep pays back from later commission. With a non-recoverable draw, the draw is a guaranteed minimum: in a weak month the rep keeps it and owes nothing.

The table shows four months with a $3,000 monthly draw. In the recoverable column, commission above the draw first clears the balance owed before any extra is paid.

• Over the four months the recoverable draw paid exactly the $12,000 earned; it only smoothed the timing.
• The non-recoverable draw paid $1,800 more than the commission earned, the cost to the business of guaranteeing income.
• Write down what happens to an unpaid balance if the rep leaves. Whether it can be collected depends on the contract and local wage law.

How commission is taxed in the US

For employees, the IRS treats commissions as supplemental wages, alongside bonuses and overtime. If the employer withheld income tax from the employee’s regular wages in the current or previous year, it may withhold federal income tax on commission paid separately at a flat 22%. Supplemental wages above $1 million in a calendar year must be withheld at 37%.

The flat rate is only withholding, not the final tax. Commission is taxed as ordinary income on the annual return, so you may get some back or owe more. Social Security and Medicare taxes apply as usual. Independent contractors paid commission have no tax withheld and handle their own tax, including self-employment tax.

Frequently asked questions

Sources

• IRS, Publication 15 (2026), Circular E, Employer’s Tax Guide: Supplemental wages

General information, not financial, tax or legal advice. Rules change and differ by place; check with the official source or a qualified adviser before you act.