How sales commission is calculated
A commission is a share of what you sell, paid on top of or instead of a fixed salary. The basic sales commission formula multiplies the amount the plan is based on by the commission rate. $50,000 in sales at a 5% rate earns $2,500. If you also get a base salary of $3,000 a month, your total pay for the month is $5,500 before taxes.
The effective rate is the share of your sales you actually earn. With a flat rate it equals the rate. With tiers it is a blend of the rates, which makes it the easiest way to compare two plans that are built differently.
Tiered commission: marginal or whole amount
Many plans pay a higher rate once you pass a sales threshold. The calculator starts with three tiers: 5% from $0, 7% from $25,000 and 10% from $50,000. What those tiers pay depends on one detail of the plan:
- Marginal tiers (each rate on its slice) work like tax brackets. On $60,000 you earn 5% on the first $25,000, 7% on the next $25,000 and 10% on the last $10,000: $4,000 in total, an effective rate of 6.67%.
- Whole-amount tiers (the reached rate on everything) apply the rate of the highest tier you reach to all of your sales. On $60,000 that is 10% of everything: $6,000.
| Sales | Marginal tiers | Whole-amount tiers |
|---|---|---|
| $20,000 | $1,000 | $1,000 |
| $40,000 | $2,300 | $2,800 |
| $49,000 | $2,930 | $3,430 |
| $50,000 | $3,000 | $5,000 |
| $60,000 | $4,000 | $6,000 |
| $80,000 | $6,000 | $8,000 |
Look at the jump between $49,000 and $50,000. With whole-amount tiers, $1,000 more in sales lifts the commission from $3,430 to $5,000, because the higher rate suddenly applies to everything. That cliff is a strong incentive to close one more deal before the period ends. Marginal tiers have no cliff: each extra sale simply earns the rate of the tier it falls into. Under the result, the calculator shows how much more you need to sell to reach the next tier.
Commission on gross profit instead of revenue
Some plans pay on gross profit, the sales minus the cost of the goods or services sold. $50,000 in sales with $35,000 in costs leaves $15,000 of gross profit, and a 20% commission on that is $3,000, an effective rate of 6% of sales. Rates on gross profit are usually higher than rates on revenue because the amount they apply to is smaller, so compare plans by the money they pay, not by the percentage.
On a profit-based plan, a discount you give lowers your commission too, since it comes straight off the gross profit. If the cost of sales is higher than the sales, there is no gross profit and the calculator shows no commission.
Sales you need for your target earnings
Choose "Sales for a target" to work backward from the income you want. The calculator takes your target, subtracts the base salary and turns the commission that is left into sales. To reach $8,000 a month on a $3,000 base you need $5,000 in commission. With the three default tiers that takes $70,000 in sales with marginal tiers, or $50,000 with whole-amount tiers.
On a gross profit plan, the target first becomes the gross profit you need, then sales at the gross margin you enter. If no amount of sales can reach the target, for example because the last tier pays 0%, the calculator says so.
Draw against commission
A draw is an advance on commission paid every period, which gives salespeople a steadier income in slow months. The commission you earn pays the draw back first, and anything above the draw is paid on top. There are two kinds:
- Recoverable draw. If your commission is below the draw, the difference is carried over and taken from later commissions. With a $2,000 draw and $1,200 of commission, you receive $2,000 and owe $800. If you then earn $3,500 the next month, $800 pays back what you owe, the draw covers $2,000 of the rest, and $700 is paid on top.
- Non-recoverable draw. A shortfall is not carried over. In the same first month you receive $2,000 and owe nothing.
Enter the draw and, for a recoverable draw, any amount still owed from earlier periods. The result shows what you are paid this period and what carries over. Your written commission plan decides which kind of draw you have and how long a balance can be carried.
Commission, minimum wage and overtime in the US
For employees who are not exempt under the Fair Labor Standards Act, the US Department of Labor explains that overtime pay is based on the regular rate, the average hourly rate derived from your earnings, whether they come from a salary, piece rates or commission, and that the regular rate may not be lower than the federal minimum wage or a higher state or local minimum wage (Fact Sheet #56A, December 2019). Commission-only pay in a slow week can therefore still have to reach the minimum wage for the hours worked. Some retail and service jobs paid mostly by commission are exempt from overtime under section 7(i) when three conditions are met (Fact Sheet #20, July 2008). This calculator shows gross pay and does not check these rules.
How to use the commission calculator
- 1Choose "My commission" to see what you earn, or "Sales for a target" to find the sales you need.
- 2Pick what the commission is paid on: sales at a flat rate, sales in tiers, or gross profit. For tiers, enter where each tier starts and its rate, and choose whether each rate applies to its slice or the reached rate to all sales.
- 3Enter your sales, or your target income, and add a base salary and a draw if your plan has them. Pick the period all amounts refer to.
- 4Read your commission, total pay and effective rate, and the breakdown by tier. Copy the result or a link that keeps all your numbers. For the pay you take home after taxes, enter the total in the paycheck calculator, and to compare a new offer, try the raise calculator.
Frequently asked questions
How do I calculate sales commission?
Multiply the sales by the commission rate as a decimal. $50,000 in sales at 5% is 50,000 × 0.05 = $2,500. With a base salary, add the base to get your total pay for the period: $3,000 + $2,500 = $5,500.
What is the difference between marginal and whole-amount tiers?
With marginal tiers each rate only applies to the slice of sales inside its tier, like tax brackets. With whole-amount tiers the rate of the highest tier you reach applies to all of your sales. On $60,000 with 5% up to $25,000, 7% up to $50,000 and 10% above, marginal tiers pay $4,000 and whole-amount tiers pay $6,000. Your commission plan says which one you have.
How many sales do I need to reach my target income?
Subtract your base salary from the target, then divide what is left by the commission rate. To earn $8,000 a month on a $3,000 base at 5%, you need $5,000 in commission, so $5,000 ÷ 0.05 = $100,000 in sales. Choose "Sales for a target" and the calculator also handles tiers and gross profit plans.
Why do some companies pay commission on gross profit?
Commission on gross profit pays on what the sale earns after the cost of the goods or services, not on the price alone. A discount then lowers both the profit and the commission. $50,000 in sales with $35,000 in costs leaves $15,000 of gross profit, and 20% of that is $3,000.
What is a draw against commission?
A draw is an advance paid every period that your commission pays back. If your draw is $2,000 a month and you earn $1,200 in commission, you still receive $2,000. With a recoverable draw the $800 gap is taken from later commissions; with a non-recoverable draw it is not. Your written plan says which kind you have.
Is commission included when overtime is calculated?
For employees who are not exempt under the US Fair Labor Standards Act, the Department of Labor says overtime pay is computed from the average hourly rate derived from your earnings, whether they come from a salary, piece rates or commission. It also says this regular rate may not be lower than the federal minimum wage or a higher state or local one. Check its Fact Sheet #56A or ask your employer for details.