Commissions work as performance-based wages: your employer pays you a percentage of each sale, a flat amount per deal, or a rate that changes as you hit targets, according to a written commission agreement that defines when the money is earned and when it is paid. Federal law does not require any employer to offer commissions, but once an agreement exists, wage-and-hour rules govern how those earnings are calculated, taxed, and protected.1U.S. Department of Labor. Commissions The details in your agreement — especially the definition of “earned” — decide almost every dispute that arises later.
How You Get Paid: Structure and Calculation
Most plans use one of two pay structures. A base salary plus commission gives you a fixed paycheck each period and adds variable pay on top; the guaranteed base covers slow months and employers often use it for roles with long sales cycles or heavy administrative work. Straight commission pays you entirely on what you sell, with no salary floor. The risk is higher, but rates on straight-commission plans are usually higher too.
Within either structure, the dollar amount of each commission is calculated one of four ways:
- Flat rate. A set dollar amount for every unit or deal, regardless of sale price.
- Percentage of revenue. A percentage of the total sale price, so bigger deals mean bigger checks.
- Tiered or accelerator. Your rate rises after you cross a threshold. For example, five percent on the first $50,000 in quarterly sales, then eight percent on everything above that.
- Gross margin. A percentage of profit after cost of goods sold, which pushes you toward higher-margin deals rather than high-volume, low-margin ones.
Many plans mix methods. Your agreement should say exactly which method applies to which product or service.
Draws Against Commission
A draw is an advance your employer pays you before commissions are finalized, so you have income while deals move through the pipeline. There are two kinds, and the difference matters.
A recoverable draw is essentially a loan against future commissions. If you take a $2,500 draw and earn only $2,000 in commissions that period, you carry a $500 deficit into the next period and repay it from future earnings. Good months erase the balance. A long slump can dig a real hole.
A non-recoverable draw is a guaranteed minimum. You keep the full draw amount even if your commissions fall short, and you receive the difference on top if you exceed it. Employers usually reserve this for new hires who are ramping up.
Either way, check every pay stub. Confirm the draw balance your employer reports matches your own numbers.
How Commissions Are Taxed
Commissions are wages, and the IRS treats them as supplemental wages for withholding.2eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments That classification changes how federal income tax comes out of your check.
- When commissions are paid separately from regular wages, or shown as a distinct line item, your employer withholds federal income tax at a flat 22 percent.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
- If your total supplemental wages from one employer exceed $1 million in a calendar year, the portion above $1 million is withheld at 37 percent.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
- If your employer lumps commissions into your regular paycheck without breaking them out, withholding is calculated on the combined total using the standard wage-bracket or percentage method, which can push a big paycheck into a higher withholding bracket for that period.
Commissions are also subject to Social Security tax at 6.2 percent (up to the annual wage base) and Medicare tax at 1.45 percent, the same rates as regular wages. Remember that withholding is not your final tax rate. Your actual liability is settled when you file your return, and anything overpaid comes back as a refund.
Minimum Wage and Overtime Rights
Federal law puts a floor under your earnings and, depending on your role, entitles you to overtime.
Whatever your commission structure, your total earnings for a workweek must equal at least the federal minimum wage of $7.25 per hour for every hour worked.4Office of the Law Revision Counsel. 29 USC 206 – Minimum Wage If commissions come up short, your employer has to make up the difference. Many states set a higher minimum, so your employer’s obligation may be greater where you work. Deductions for returned merchandise, uniforms, or register shortages cannot reduce your pay below the minimum wage floor.5U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act
Two overtime exemptions come up most often for commissioned workers. Under the retail or service establishment exemption, your employer does not owe overtime if more than half of your pay over a representative period of at least a month comes from commissions and your regular rate exceeds one and a half times the federal minimum wage.6Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours – Section: (i) Employment by Retail or Service Establishment If either condition fails in a given period — commissions dip below 50 percent, for instance — the exemption doesn’t apply and you’re owed time-and-a-half for hours over 40 that week.
The outside sales exemption applies if your primary job is making sales and you regularly work away from your employer’s office, at client sites, trade shows, or door-to-door. It removes both overtime and minimum wage requirements and, unlike most exemptions, has no salary threshold.7Office of the Law Revision Counsel. 29 USC 213 – Exemptions Sales made by phone, email, or internet from a fixed location are inside sales and don’t count. Any fixed site you use as a home base for phone solicitation counts as your employer’s place of business, even if your employer doesn’t own it.8U.S. Department of Labor. Fact Sheet 17F – Exemption for Outside Sales Employees Under the FLSA
Your job title does not decide the question. The Department of Labor looks at your actual daily duties, not what your business card says.9U.S. Department of Labor. Fact Sheet 17A – Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the FLSA If most of your time goes to non-sales administrative work, you likely fail the duties test even if “Sales Representative” is on the door.
When Plans Change and When Commissions Get Clawed Back
Employers can generally change commission rates, quotas, and plan terms going forward as long as they give notice before the new terms take effect. What they cannot do is apply changes retroactively to commissions you have already earned. If your agreement says a commission vests when the customer signs, a deal you closed yesterday cannot be recalculated at a lower rate announced today.
Read your agreement for a modification clause. Many plans let the employer amend terms at any time with written notice; plans without such a clause are more vulnerable to challenge on mid-period changes. Keep copies of every version of your commission plan. They become critical evidence if a dispute arises over what rate applied to a specific sale.
A clawback happens when your employer takes back commission pay already issued, usually because a customer returned a product, canceled within a specified window, or failed to pay. Whether the clawback is enforceable depends on when your commission was considered “earned” under your agreement. If the contract says a commission vests only after 90 days of continued service, a day-60 cancellation means the commission was never fully earned. If the contract says it vests at the point of sale, a later cancellation may not entitle the employer to recover it.
The definition of “earned” is the single most important clause in the agreement. No federal law specifically governs commission clawbacks; your written agreement and state wage-payment law control the outcome. Some states prohibit clawback deductions from future paychecks if they would push your pay below minimum wage.
Commissions After You Leave
Disputes cluster around departures. You quit or are fired, deals you started close weeks later, and it isn’t clear who gets paid. Federal law does not directly address post-termination commissions, so your written agreement is the primary authority.
If the agreement is silent, some courts apply the procuring cause doctrine: if you did the essential work to bring about a sale before leaving, you may be entitled to the commission even though the deal closed after your departure. Courts have applied this both to terminated workers and to those who quit voluntarily. It does not override clear contract language specifying when commissions are earned.
State wage-payment laws add another layer. The deadline for your final paycheck, including earned but unpaid commissions, varies significantly by state, from a few days after separation to the end of the next pay period. Document any disputed deals as you leave.
If Your Employer Won’t Pay
Deadlines matter. You have two years from the violation to sue for unpaid minimum wages or overtime under federal law, or three years if the violation was willful.10Office of the Law Revision Counsel. 29 USC 255 – Statute of Limitations
You don’t need a lawyer to start. The Department of Labor’s Wage and Hour Division investigates complaints and can pursue back wages for you. Call 1-866-487-9243 or use the WHD website to reach your regional office. Complaints are confidential — your employer is not told who filed — and federal law prohibits retaliation against you for filing.11U.S. Department of Labor. How to File a Complaint
An employer who violates FLSA minimum wage or overtime rules is liable for the unpaid wages plus an equal amount in liquidated damages, effectively doubling what you’re owed, and courts can add reasonable attorney’s fees.12Office of the Law Revision Counsel. 29 USC 216 – Penalties Repeat or willful violators face civil penalties of up to $2,515 per violation, adjusted annually.13eCFR. 29 CFR Part 578 – Tip Retention, Minimum Wage, and Overtime Violations – Civil Money Penalties
Most states have their own wage-claim process through the state labor department, sometimes with stronger remedies than federal law offers. Before you file either way, pull together your commission agreement, pay stubs, sales records, and any written communication about the disputed deals. Strong documentation moves a claim faster than any argument you can make without it.
One boundary worth naming: all of this assumes you are classified as an employee. If your company treats you as an independent contractor, the minimum wage, overtime, and federal wage-payment protections above do not apply to you, and misclassification is its own inquiry.14U.S. Department of Labor. Final Rule – Employee or Independent Contractor Classification Under the Fair Labor Standards Act