Payroll for commission-based employees: What payroll professionals need to know

June 18, 2026

Sara Maginn Pacella

One of the many ways that payroll expertise is an asset to an organization is the ability to manage complex payroll systems with various pay functions. Like managing payroll systems for salaried or hourly employees, commission-based payroll, such as that for real estate and sales, requires detailed recordkeeping and accuracy, but it also presents unique challenges and opportunities.

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What is variable compensation anyway?

Unlike a predetermined salary or hourly rate, variable compensation is granted based on individual performance. The most common types of variable compensation are sales commissions, long-term incentive plans and annual bonuses. Commissions are a type of compensation, typically in sales roles, where employees receive a set percentage of the sales they make, meaning the more they sell, the more they earn.

The benefits of offering commissions include employee motivation, alignment of sales goals with the organization as a whole, transparency for employees on how their efforts impact the business and higher retention of high performers in sales roles.

Standard commission calculation methods

When building out commission calculation procedures, organizations should ensure they set clearly communicated targets and align how they’re paying with sales cycles (i.e., consider simple calculation rates for shorter-term deals and higher tiered or milestone rates for things like client renewals or bigger, ongoing deals). These communications should be targeted to both commission-only employees and employees who receive a base salary plus commission.

Common types of commission calculations include:

Commission as a percentage of a product selling price (i.e., a person who sells a $10,000 product and is on a 10 per cent commission structure receives $1,000 commission);
Gross margin commission method, where a person earns a percentage of the profit from the sale of a product (i.e., if a person sells a $10,000 product and there are $500 worth of expenses connected with the sale of the product, they would earn 10 per cent of $9,500, or $950);
Percentage of selling price minus base price (i.e., if a person sells a product for $10,000 and its base price was $5,000, a commissioned employee earning a 10 per cent commission would earn $500);
Residual commissions, where a sales representative continues to make money as the client generates revenue; and
Base salary plus commissions, a hybrid compensation method where an employee earns a base salary or hourly rate in addition to a commission rate, as drawn up in their contract, determined by sales/performance (this is the most common type of commission).

” The benefits of offering commissions include employee motivation, alignment of sales goals with the organization as a whole, transparency for employees on how their efforts impact the business and higher retention of high performers in sales roles ”

The rules surrounding the payment of variable compensation

While there may be slight differences across provinces, the standard rules governing the payment of variable compensation remain largely the same. As with salaried employees, accurate and timely payment is critical for those on commission-only payroll.

Note: In Ontario, as outlined by Achar Law, “Employees must still receive at least the minimum wage over the applicable pay period, and employers must comply with vacation pay and other Employment Standards Act requirements.”

Achar Law also explains that under Ontario’s Employment Standards Act, as an example, commissions are treated as wages, and as such, once they are earned, they should be:

Paid in full;
Released on the employee’s scheduled payday; and
Follow all the same legal rules that apply to other wages.

For people who are categorized as employees within an organization, payroll must deduct the correct amounts of income tax, CPP contributions and EI premiums from their wages and provide a T4. People who are independent contractors or self-employed (i.e., not employees) are personally responsible for their contributions and filing, not the organizations they provide services to.

Common payroll mistakes surrounding variable pay processing

The Government of Canada outlines common employer mistakes to avoid when processing variable compensation, including:

Refusal to pay commissions after employee termination;
Delays in commission payments;
Not providing written commission agreements or using agreements with unclear or unenforceable clauses; and
Changing commission structures without obtaining employee consent.

What needs to be included in a commission agreement

Employers must provide clear and understandable commission contracts. This ensures that employees are not surprised or demotivated by miscommunications. Clear contracts are also necessary in the eyes of the court, where unclear language about compensation terms for commission contracts is generally ruled in favour of the employee, not the employer. It is also recommended that all organizations have a legal team review any contracts to ensure they are clear and state the employer’s intentions to avoid future disputes or ambiguity.

Best practices for commission agreements include clear definitions of:

How commissions are earned;
How commissions are calculated;
The dates at which commissions are considered earned;
When commissions are paid; and
Any terminations, resignations or termination notice period clauses and how they impact payments.

What technology should be used for commission-based payments?

Organizations opting to pay employees via commission must research payroll systems that support and facilitate the tracking of such payments. For those switching systems, reference checking new systems should reach out to organizations that use commission-based payments to help determine whether a system will meet your needs. Some examples* of commission software include CaptivateIQ, Oyster Global Payroll, Rippling, Varicent and Xactly. Effective commission-based systems will automate payroll calculations and processes (removing manual error) and provide important reporting and analysis. Effective systems will also provide transparency, enabling commission-based employees to access their payment information in real time.

*Note: National Payroll Institute does not endorse any particular commission software; this article simply provides examples of what is currently on the market.

Conclusion

Commission-based pay can be an excellent way to motivate employees, so long as it is consistent, timely, transparent and fair. Payroll professionals play a critical role in ensuring accurate payment and compliance for all employees.

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