Question 1

What commission structures are most common?

Accepted Answer

There are several standard structures and most commission agreements use one — or combine several. Straight commission pays a percentage of revenue or gross profit on every closed sale with no base salary, and is common for outside sales reps and manufacturer's representatives. Salary plus commission combines a base salary with a smaller commission rate, providing income stability and is the most common structure for inside sales teams in SaaS and B2B. Tiered commissions increase the rate as the rep crosses revenue thresholds (for example, 8% up to $500k of bookings, 12% from $500k to $1M, and 15% above $1M), which strongly incentivizes overperformance. Draw against commission gives the rep an upfront advance that is then recovered from later commissions. Residual commissions pay an ongoing percentage as long as the customer remains a client, which is common in insurance, payment processing, and SaaS.

Question 2

What is a draw against commission?

Accepted Answer

A draw is a regularly paid advance against future commissions, typically paid weekly or biweekly to give the sales rep predictable income while they build a pipeline. Draws come in two flavors. A recoverable draw is treated as a loan: if the rep's earned commissions for a period exceed the draw, the surplus is paid out, but if they fall short, the deficit carries over and is recovered from later commission earnings. A non-recoverable draw is essentially a guaranteed minimum: if earned commissions exceed the draw the rep gets the surplus, but if they fall short the company eats the difference. Recoverable draws can quickly become a problem when reps fail to close enough business and end up owing the company money — and several state sales rep statutes restrict how aggressively employers can recover negative draw balances after termination.

Question 3

What is a chargeback in a commission agreement?

Accepted Answer

A commission chargeback is the reversal of a commission that was previously credited to or paid to the rep, typically because the underlying sale was canceled, refunded, charged back by the customer, or determined to be fraudulent within a defined lookback period. The agreement should clearly state the chargeback rules: the events that trigger a chargeback, the lookback window (commonly 30 to 120 days), how the chargeback is collected (deduction from future commissions or direct repayment), and any cap on how far back the company can reach. Chargebacks are legally enforceable in most states as long as they are clearly disclosed in writing before the sale is made. Several states (notably California Labor Code 2751 and Massachusetts) require the commission plan to be in writing and signed before any chargeback can be enforced against an employee.

Question 4

Are post-termination commissions owed?

Accepted Answer

This is one of the most heavily litigated areas in commission law. The general common-law rule (the 'procuring cause' doctrine) is that a sales rep is entitled to commission on a sale they procured even if the sale closes after termination, unless the agreement clearly says otherwise. Many employers try to override this rule with contract language stating that commissions are only earned when the customer pays — and the rep must be employed at the time of payment. Whether such a clause is enforceable depends on state law. Several state sales-rep statutes (Illinois, Massachusetts, New York, Tennessee, Pennsylvania, and others) protect terminated independent sales reps and require payment of commissions on orders placed before termination, sometimes with double or triple damages and attorneys' fees for violations. A well-drafted commission agreement specifies exactly when commissions are earned and what happens on termination.

Question 5

What are state sales representative laws?

Accepted Answer

Roughly 35 states have enacted sales representative protection statutes that govern the commission relationship between manufacturers and independent sales reps. These statutes typically apply to outside reps (not employees), require commission terms to be in writing, set deadlines for paying commissions after termination (often 30 days), and provide statutory penalties for unpaid commissions. The penalties are aggressive: most state statutes provide for double or triple damages and award attorneys' fees and costs to the prevailing rep. Some states extend similar protections to employee sales reps. Examples include the Illinois Sales Representative Act (820 ILCS 120), the Massachusetts Independent Sales Rep Statute (M.G.L. c. 104 § 7), and the California Independent Wholesale Sales Representatives Contractual Relations Act (Cal. Civ. Code §§ 1738.10 et seq.). Manufacturers operating in multiple states should review the rep statute of every state where their reps do business.

Question 6

How are commissions treated for tax purposes?

Accepted Answer

For employees, commissions are wages and are subject to federal income tax withholding, FICA (Social Security and Medicare), FUTA, and state income tax withholding just like base salary — they are reported on Form W-2. The IRS treats commissions as 'supplemental wages,' which means employers can either combine commissions with regular wages and withhold at the regular rate or use the flat 22% supplemental wage withholding rate (37% for cumulative supplemental wages over $1 million). For independent contractor sales reps, commissions are 1099 income reported on Form 1099-NEC if they exceed $600 in a year, and the rep is responsible for self-employment tax, quarterly estimated payments, and any state-level business taxes. The classification of the rep as employee vs contractor matters enormously and is governed by the IRS 20-factor test, the DOL economic-realities test, and state-specific tests like California's ABC test.

Question 7

Can a company change the commission plan unilaterally?

Accepted Answer

It depends on what the agreement says and on state law. Many commission agreements expressly reserve the company's right to modify the commission plan at any time, with or without notice, and courts generally enforce such reservations going forward — meaning the company can change the rate for new sales but cannot retroactively reduce commissions on sales already booked or earned. Several states impose limits on retroactive changes even with broad reservation language. California, in particular, treats earned commissions as wages that cannot be forfeited or reduced once earned. The best practice is to put any commission plan changes in writing, give reasonable advance notice (30 days is standard), preserve commissions on sales already in the pipeline at the time of the change, and obtain written acknowledgment from the rep before the change takes effect.

Question 8

What is the difference between bookings, billings, and collections?

Accepted Answer

These three terms describe three different points in the sales cycle and the commission agreement should specify which one triggers the commission. Bookings is the moment a customer signs an order or contract — the commission is earned when the deal closes regardless of whether the customer has paid. Billings is the moment the company invoices the customer for delivery or installment payments. Collections is the moment the customer's payment actually clears. Reps prefer commissions on bookings because they get paid faster, but employers prefer commissions on collections because it shifts the risk of non-payment onto the rep. Many SaaS companies pay commissions on bookings but include a clawback if the customer churns within the first 6 to 12 months. The agreement should spell out exactly which event triggers commission, when payment is due, and what happens if the customer never pays.

Question 9

Does a commission agreement need to be in writing?

Accepted Answer

In several states it must be. California Labor Code Section 2751 requires that any commission agreement with an employee whose work is performed in California be in writing, signed by both parties, and include the method of computation and payment of commissions. The employer must give the employee a signed copy. Other states with written-agreement requirements for commission relationships include New York, Massachusetts, Illinois, Maryland, and several states with sales-rep statutes. Even where not strictly required, a written commission agreement is essential because commission disputes are extremely common and oral agreements are extraordinarily difficult to enforce. The writing should cover the commission rate, the events that trigger commission, payment timing, chargebacks, post-termination commissions, modification rights, and dispute resolution.

Question 10

How does the IRS classify commissions for sales reps?

Accepted Answer

Commissions are taxable compensation regardless of whether the rep is an employee or independent contractor. For employees, the IRS treats commissions as 'supplemental wages' under Treasury Regulation 31.3402(g)-1, and employers can use either the aggregate method (combine with regular wages) or the flat 22% withholding method (37% for amounts over $1 million in a year). For independent contractors, commissions are reported on Form 1099-NEC if they exceed $600 annually and the rep is responsible for self-employment tax (15.3% of net earnings), quarterly estimated tax payments, and deducting business expenses on Schedule C. Misclassifying a sales employee as an independent contractor exposes the company to back payroll taxes, penalties, interest, and potential class action liability — and the IRS, the DOL, and state labor agencies have all increased enforcement against sales-rep misclassification in recent years.

Question 11

Can a non-compete clause be included in a commission agreement?

Accepted Answer

Yes, though enforceability varies dramatically by state. Some states (California, North Dakota, Oklahoma, and now Minnesota) ban most employee non-competes entirely. Others enforce them only if they are reasonable in scope, geography, and duration and supported by adequate consideration. The FTC issued a rule in 2024 that would have banned most non-competes nationwide; that rule was struck down by a federal court but the issue is still in flux at both the federal and state level. For commission agreements specifically, the more enforceable approach is usually a customer non-solicitation clause (the rep cannot solicit the company's customers for 12-24 months after termination) combined with a confidentiality clause protecting customer lists and pricing information. These narrower restrictions are easier to defend in litigation than a broad non-compete.

Question 12

What happens to unearned commissions when the rep is fired?

Accepted Answer

It depends on the agreement and state law. The general rule is that commissions that have already been earned must be paid even after termination. The harder question is what counts as 'earned.' If the agreement says commissions are earned only when the customer pays, then the rep typically loses out on pipeline deals that close after termination — although some states recognize a 'procuring cause' exception that pays the rep on deals they originated. State sales rep statutes typically require payment of all earned commissions within 14-30 days of termination and impose penalties (often double or triple damages plus attorneys' fees) for late payment. The best practice is to include a clear post-termination commission schedule in the agreement that handles bookings, pipeline, and residuals separately.

Structure	Pay Driver	Income Stability	Best For
Straight Commission	100% of pay tied to sales	Low	Outside reps, manufacturer reps
Salary + Commission	Mix of base and incentive	Medium	SaaS, B2B inside sales
Bonus Structure	Salary plus discretionary bonus	High	Account managers, CSMs
Tiered Commission	Rate increases at quota tiers	Low-medium	High-leverage hunters
Flat Salary	Fixed wage, no incentive	Highest	Customer support, ops
Profit Sharing	% of company profit	Medium	Partners and key employees

Free Commission Agreement Forms

What Is a Commission Agreement?

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State Law Compliance

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Commission Agreement

Section 1: Parties

Section 2: Commission Structure

Section 3: When Earned

Section 4: Chargebacks

Section 5: Payment Schedule

Section 6: Execution

Types of Commission Agreements

Straight Commission Agreement

Salary Plus Commission

Tiered Commission Agreement

Draw Against Commission

Residual Commission Agreement

Override Commission

Independent Sales Rep Agreement

Real Estate Commission Agreement

Bonus Commission Agreement

Commission vs Other Pay Structures

How to Create a Commission Agreement

Pick the structure

Define the commissionable event

Set the rate and any tiers

Spell out chargebacks and clawbacks

Address post-termination commissions

Add modification and reservation language

Sign and provide a copy

Key Components

Parties and effective date

Commission rate and structure

Quota and territory

Commission earning event

Draws and advances

Chargebacks and clawbacks

Modification rights

Termination provisions

Confidentiality and non-solicit

Dispute resolution

State Sales Representative Laws

Common features of state sales-rep statutes

Legal Requirements

Sample Commission Agreement

SALES COMMISSION AGREEMENT

Frequently Asked Questions

Official Resources

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