How to calculate commission
Commission = Sales × Commission rate. $40,000 of sales at 5% earns $2,000. If you also get a base salary, total pay is base + commission.
Tiered commission
Many plans pay a higher rate once you pass a target. With 5% on the first $25,000 and 8% above it, $40,000 of sales earns $25,000 × 5% = $1,250 plus $15,000 × 8% = $1,200, for $2,450 – an effective rate of 6.1%. Each rate applies only to the sales inside its tier, not to the whole amount.
Common commission structures
- Straight commission – pay is 100% commission; common for independent sales agents.
- Base + commission – a guaranteed salary plus a smaller commission.
- Tiered – rates step up as sales pass thresholds.
- Gross margin commission – a percentage of profit rather than revenue, which stops reps discounting heavily. Check margins with the profit margin calculator.
- Draw against commission – an advance repaid from future commission.
Real estate commission
A home sale commission is typically a percentage of the sale price split between the listing and buyer's brokerages, and then between each broker and agent. For example, a 5% commission on a $400,000 sale is $20,000; split 50/50 between brokerages that is $10,000 each, and an agent on a 70/30 split with their broker takes $7,000. Billing a commission? Use the real estate commission invoice template.
Frequently asked questions
What is a typical sales commission rate?
It varies widely by industry: roughly 2–5% for high-value items like cars or real estate, 5–10% for many B2B products, and 20–30% or more for some software and services sales.
Is commission calculated on gross or net sales?
It depends on the plan. Many companies pay on net sales after returns and discounts, or on gross margin. Check your commission agreement.
How does a tiered commission work?
Each rate applies only to the sales within its band. Passing a threshold raises the rate on the additional sales, not retroactively on all sales – unless your plan says otherwise.
Is commission taxed differently?
In the US, commission is ordinary income. Employers often withhold federal tax on it at a flat supplemental rate, but your final tax depends on your total income.
