Your first commission check is usually a happy moment. A rep closes a deal, the CRM flips to closed-won, and someone has to figure out what actually lands in their bank account. That’s where many small sales teams discover commission pay follows different payroll rules than salary, and mistakes compound with every rep you add.
The rules themselves aren’t complicated once you see them laid out. Federal withholding, Social Security and Medicare, overtime math for inside reps, and state paperwork requirements all affect commission payments. We’ll walk through each one with real numbers so you can pay your team accurately and avoid surprise tax notices or wage claims.
The IRS groups commissions with bonuses, overtime, and severance under supplemental wages. IRS Publication 15, the Employer’s Tax Guide, defines these as payments on top of an employee’s regular wages and gives employers special withholding options. The most common option is a flat 22% federal rate, which the IRS confirms is staying put for 2026. That predictability is a big reason most small teams handle commissions this way.
Supplemental classification only changes federal income tax withholding. Commissions are still fully subject to Social Security and Medicare, and your company owes its matching share on every dollar, just like it does on salary. They’re also wages for federal and state unemployment tax purposes. In practice, a commission check carries almost the same tax load as a salary check, and your main decision is how to calculate the income tax portion.
Publication 15 gives you two ways to withhold federal income tax on a commission. The flat rate method applies a straight 22% to the commission, and you can use it only if the commission is paid separately or itemized separately from regular wages and you’ve withheld income tax from that employee’s regular wages this year or last year. The aggregate method adds the commission to the regular paycheck, runs the combined total through the employee’s W-4 and the standard withholding tables, and then subtracts what was already withheld on the regular wages. Both methods are legal, and the employee settles any difference when they file their return.
Most small teams default to the flat rate because it’s predictable and easy to explain to reps. A rep in a lower bracket may feel over-withheld at 22%, while a high earner may owe money in April if every commission check is withheld at the flat rate. The aggregate method tracks each rep’s actual situation more closely, but it produces bigger swings from check to check. Pick one approach, document it in the comp plan, and apply it consistently so nobody gets a different answer depending on who ran payroll that week.
The employer share is the part founders forget most often. When an account executive earns a $4,000 commission, your company pays its own Social Security and Medicare match on top of that amount, so the true cost lands a few hundred dollars higher than the number in the comp plan. Unemployment taxes add a bit more, and none of it shows up if you build commission budgets in a spreadsheet that only tracks what reps earn. Bake the employer share into your sales budget from day one so a big quarter doesn’t create a cash surprise.
State taxes add another layer. Some states publish their own flat supplemental withholding rate, while others have no income tax at all. If your reps work in different states, each one’s withholding follows that state’s rules, which is exactly where manual calculations start to break.
Many founders assume anyone earning commission is exempt from overtime. That’s only true for outside sales employees, meaning reps whose primary duty is making sales away from the employer’s place of business. An SDR or account executive who works the phones, email, and video calls from an office or a home office is usually an inside sales employee, and inside sales roles are generally non-exempt under the Fair Labor Standards Act. A narrow exemption exists for commissioned employees of retail and service establishments, but most B2B software and services teams won’t qualify for it.
For non-exempt reps, commissions change the overtime math. The Labor Department’s regular rate of pay rules require you to divide all compensation for the workweek, commissions included, by total hours worked, then pay at least half that rate again for every hour over 40. Leave the commission out and you’ll underpay overtime every week a rep works long hours, which is a common source of wage claims.
Here’s how it plays out. Say an hourly SDR works a few hours of overtime in the same week they book a commission. Because the commission raises their regular rate for that week, the overtime premium goes up too, and paying it off the base hourly rate alone underpays them. When commissions are paid monthly or quarterly, federal regulations require you to spread them back across the workweeks in which they were earned and pay any additional overtime owed for those weeks.
State law can push this further. For example, the Massachusetts Supreme Judicial Court ruled that inside sales employees paid only through commissions and draws are owed separate overtime and Sunday premium pay on top of those commissions. California, New York, and other states also layer their own rules over the federal baseline. If you’re hiring reps in multiple states, check each state’s labor department guidance before you finalize a pay structure.
A written commission plan protects both sides, and in some states it’s mandatory. California Labor Code section 2751 requires employers to give commissioned employees a signed written agreement that explains how commissions are calculated and paid, and the employee has to sign an acknowledgment of receipt. Even where the law doesn’t require one, a written plan is the clearest way to settle disputes about split deals, territory changes, or commissions on deals that close after a rep leaves.
The plan should define exactly when a commission is earned. Some teams pay on contract signature, others on first payment received, and others only after a customer clears a refund window. That trigger determines when the money becomes a wage, and wage-deduction rules in many states limit your ability to claw back commissions you have already earned and paid. Draws need the same clarity, so spell out whether a draw is recoverable against future commissions and what happens to an unrecovered balance when someone quits.
Your commission data almost certainly lives in your CRM, so the plan should name it as the system of record. Closed-won dates, deal values, and payment status feed payroll, and messy pipeline hygiene turns directly into payroll errors. If you’re still choosing that system, budget for what a CRM really costs over the first year, since seat minimums and plan tiers often decide whether you get the reporting you need to export commission data cleanly each pay period.
Spreadsheet commission tracking usually works for one or two reps and falls apart around the third. Each new rep adds another W-4, sometimes another state, another set of overtime calculations, and another off-cycle payment when a big deal closes mid-month. Payroll software that supports supplemental pay types, separate commission line items, and unlimited pay runs removes most of that manual work. It also handles the tax deposits and quarterly filings that come with each commission check.
You don’t need to commit to a provider before you’ve tested your actual commission structure. The smart move is choosing a payroll platform with free account setup, so you can onboard reps and configure pay types without paying anything until you run your first payroll. That’s enough time to load a sample month of commissions, check withholding against your comp plan, and confirm pay stubs show commissions on their own line so you qualify for the flat rate method. Also look for plans that include state and local tax filing and unlimited payroll runs, since commission checks rarely line up with your regular pay schedule.
Reps outside the US need a different setup, since a domestic payroll account generally can’t withhold another country’s income taxes or meet its employment laws. If you’re building a global team, compare employer of record and contractor arrangements before you extend a commission plan across borders. Early classification decisions are expensive to unwind later, especially once commissions start flowing.
Before your next commission run, confirm a few things. Classify each rep correctly as exempt or non-exempt, and ensure every non-exempt rep’s commissions feed into the regular rate for the weeks they earned them. Document your withholding method and apply it the same way every time, and list commissions as a separate line on pay stubs. The comp plan should be signed, stored, and clear about when commissions are earned and what happens to draws and refunds.
None of this is exotic payroll work, but it does punish improvisation. The teams that avoid trouble treat commission pay as a system with written rules, clean CRM data, and software that applies the same math every pay period. Get that system in place while you’re paying two reps, and adding the tenth won’t create a payroll problem.
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