How to pay commission to sales reps without overtime or payroll surprises

Commission plans motivate reps because the rules feel simple: sell more, earn more. The payroll side is less simple. Federal wage law has specific rules about commissions and overtime, states add their own, and a vague plan turns into an argument the first time a big job cancels after the rep has been paid.

Below: how to design the plan, plus the Labor Department and IRS rules that apply, as read in October 2026. It applies to canvassers, inside sales reps who book estimates, and estimators or comfort advisors paid on sold jobs. Use it as general information; it is not a substitute for legal or tax advice. Your state may have its own rules on commission agreements and on paying commissions when someone leaves; look up your state's labor agency through our state start pages.

Are your reps employees or contractors?

Settle classification before you write the plan. Being paid only on commission does not make someone an independent contractor. If you set the territory, the hours, the script and the price, and the rep sells only your services, both the IRS and the Department of Labor tests point toward employee. Our guide to employee vs independent contractor walks through both tests.

If a rep really is an independent sales contractor, you pay their invoices and, for payments made in 2026, file Form 1099-NEC once you have paid them $2,000 or more in the year. The rest of this guide assumes employees, which is the common case for door-to-door and in-house sales.

How do you design a commission plan?

Every plan needs clear answers to six questions. Put them in writing and have each rep sign it.

For door-to-door work, a setter and closer split is common: one rep books the appointment, another closes it. Our door-to-door sales tracking guide covers how to log each knock so attribution is not a matter of memory.

Do commission-only reps still need minimum wage?

Yes, if they are nonexempt employees. Federal law treats the workweek as the standard for applying the Act, so a big month does not cover a dead week. If a rep's commissions in a given workweek, divided by hours worked, come out below the minimum wage, you owe the difference for that week. The federal minimum is $7.25 an hour; your state's may be higher, and you must follow both.

This is why many service companies pay a modest hourly base plus commission, or an advance (a draw) against commission. A base keeps every week compliant without a weekly true-up. Track hours for every commissioned employee who is not exempt; without hours, you cannot prove the minimum wage was met.

How does overtime work with commissions?

Federal rules are clear that commissions are pay for hours worked. Under 29 CFR 778.117, commissions must be included in the regular rate, whatever the formula and however often they are paid. So a rep who works more than 40 hours in a workweek is owed overtime at one and a half times a regular rate that includes the commission, not just the base.

The steps for a week with overtime:

1. Add base pay for all hours plus the commission earned that week.
2. Divide by total hours worked. That is the regular rate.
3. Owe an extra half of that rate for each hour over 40, on top of what you already paid.

Commissions are often figured after the payday for the week they were earned. 29 CFR 778.119 allows interim overtime on the hourly rate alone. Then, once the commission is known, apportion it back over the weeks in which it was earned and pay the extra overtime for each week that ran past 40 hours. Payroll services handle this if you give them the commission period and the weekly hours. Our overtime guide covers the regular rate in more depth.

Which exemptions might apply?

Two federal exemptions come up for sales staff. Both are narrow, and every condition has to be met.

Outside sales. The Department of Labor's Fact Sheet 17F (revised August 2024) requires that the employee's primary duty be making sales or obtaining orders or contracts for services, and that the employee be customarily and regularly engaged away from the employer's place of business. There is no salary requirement. But sales by mail, phone or internet do not count unless they are only an adjunct to personal calls, and a home office used as a headquarters for phone selling is treated as one of the employer's places of business. A rep who sells in customers' homes most of the day may fit; one who books estimates from the office does not. A canvasser who only sets appointments for someone else to close should get a closer look, because their primary duty may not be making sales.

Section 7(i) for retail or service establishments. Fact Sheet 20 describes an overtime exemption with three conditions: the employer must be a retail or service establishment, the employee's regular rate must exceed one and a half times the minimum wage in every overtime week, and more than half of the employee's earnings over a representative period of one month to one year must be commissions. Whether your company qualifies as a retail or service establishment is a technical question. Ask an employment lawyer before relying on it.

How do you withhold taxes on commissions?

Commissions paid to employees are wages. Social Security and Medicare apply, and federal income tax must be withheld. IRS Publication 15 classes bonuses and commissions as supplemental wages. If they are identified separately from regular wages, you can use the optional flat federal withholding rate of 22%, for supplemental wages up to $1 million in the year. Otherwise, add them to regular wages for the period and withhold normally. Your payroll provider handles either method; tell it which you want. Our payroll guide covers deposits and filings.

How do you track commissions without spreadsheets?

Commission disputes are usually data disputes. Who found the lead? Which version of the quote was signed? Did the deposit clear before the cancellation? If the answers live in texts and memory, every payday becomes a negotiation.

• Record the rep on the lead when it is created, and keep that attribution through quote, job and invoice.
• Store the signed quote and the payment status on the same record.
• Run commission reports from the same data as revenue reports, so the totals reconcile.
• Give reps a view of their own pipeline and earned commissions. Reps who can see their numbers argue less.

Most field software tracks the salesperson on a job; fewer handle setter and closer splits, chargebacks and earned-on-collection rules well. A custom CRM can encode your exact plan, so the report matches the signed agreement. To see whether your sales process is losing leads before reps even get a chance to sell, our free system quote is the place to begin.

Frequently asked questions