Commission work is still widely questioned from an ethical standpoint, and employing workers on a 100 percent commissions basis carries a heavy stigma. Here’s what you need to know to keep your commission-based business compliant, ethical, and successful.
Before you delve into your payroll, make sure that your business fits the parameters of a commission-based operation. Commission-based pay constitutes any sale in which an employee receives a percentage of the sale’s total value, as well as instances in which you pay employees flat rates for completing sales. Some examples of common commission-based positions include the following:
- Car sales
- Some retail positions
- Real estate agents
- Loan sales
- Insurance sales
Virtually any sales position can qualify for commission-based pay as long as your employees receive at least minimum wage for each hour worked.
While it’s technically legal to pay employees on 100 percent commissions, there are a few asterisks to keep in mind. The term “100 percent commission” is inherently misleading because—due to FLSA standards—you cannot employ someone on commissions alone by default. The FLSA requires you to pay employees the federal minimum wage in states which don’t have minimum wage laws, while states which do have minimum wage laws require you to pay the state’s minimum wage.
This doesn’t mean that you’re required to pay minimum wage in addition to commissions, though—if an employee makes in a day of commissions at least the amount they would make from a day of minimum wage, you don’t have to add minimum wage to their check. However, if they fail to make what they would have made while working on minimum wage, you’ll have to make up the difference.
You’ll also need to pay nonexempt employees overtime (time-and-a-half) for any hours worked over 40 in a week. You can waive the overtime payment if an employee meets the following three criteria:
- The employee works in a retail or service environment
- Over 50 percent of the employee’s pay comes from commissions
- The employee’s pay rate is at least 150 percent of the current minimum wage for every hour worked in an overtime week
The criteria are specific enough that, in most cases, you’ll need to ensure that you’re either keeping employees locked at 40 hours per week or paying them overtime for extra time worked.
The IRS considers commissions as supplemental wages as opposed to regular wages, which can cause a bit of confusion due to differences in how your employer delivers your paychecks. The rule is that if your employer pays your commission wages in the same check as your hourly or other wages, the commission gets taxed with the same parameters as your other wages. If the commission is separate, however, you’ll see a flat 22 percent tax applied to the commission’s total.
Either way, your employer will report your commissions along with your regular pay (if applicable) on your W2 form every year.
As an employer, you should make sure your employees aren’t subject to unfair or inaccurate taxation if they’re operating under 100 percent commissions with no other payment, meaning that it’s best to pay their wages in one lump sum. Employees should feel welcome approaching their employers about any questions regarding their current tax brackets.
New Jersey Stipulations
The above criteria apply to commissions-based companies across the country, but New Jersey has a few additional rules to keep in mind. Firstly, your employer cannot change your commissions percentage or wages after the point of sale. This may seem like common sense, but New Jersey legislature provides the legal recourse groundwork to protect employees in situations such as these.
Since wages earned from commission work constitute an employee’s salary under New Jersey law, tampering with that amount without providing written notice is illegal.
Another thing to keep in mind is that your employer cannot terminate (or otherwise punish) you for discussing unpaid wages or threatening action for an outstanding balance. If your employer threatens or punishes you for rightfully requesting payment that they owe you, New Jersey law protects your right to pursue charges.
Paid Time Off
Paid time off is one of the most complicated aspects of commission-based work, but the good news is that how you handle it is largely up to you. For example, if you choose to extend benefits such as vacation days and other forms of paid leave, you can use your employees’ earnings as the basis for how much you can allocate to them, or you can simply provide them with a set number of days which accrue their current salary (e.g., minimum wage).
Commission work is neither easy to perform nor intuitive from a payroll standpoint. For more information on how you can keep your commission-based business compliant and drama-free, call Abacus Payroll at (856) 667-6225 today!