How Bonuses and Commissions Work: A Sales Guy's Take

Hey everyone, Nikhil here 👋🏽

If you weren’t aware, I was an early business development and sales hire at CaptivateIQ, a leading commission tracking software platform. I saw firsthand the good, the bad, and the ugly when it comes to how commissions are handled and why commission software was important for so many organizations. 

Now at Rollfi, I’ve been exposed to the step that comes after commission calculations, payroll. And a thought I have always had is why are there not deep relationships between commission tools and payroll vendors?

If there’s one thing I have learned over the past few years, it is that incentives drive EVERYTHING. Whether it is in a more abstract form, such as human behavior, or the obvious example of sales teams, incentives are what get people out of bed in the morning and keep them pushing in a certain direction. 

So let's do a quick breakdown of what surrounds those big paydays sales people get. And how Rollfi can help change the game.

The Commission Check Cometh… With Taxes!

First, a quick tax reality check. 

Bonuses and commissions are generally taxed the same way and are classified by the IRS as supplemental wages. They are subject to federal income tax, state income tax (where applicable), and payroll taxes such as Medicare and Social Security.

For federal income tax withholding, employers typically use one of two methods:

1. Percentage Method: A flat 22% federal withholding rate is applied to bonuses and commissions up to $1 million. For amounts exceeding $1 million, the withholding rate increases to 37% for the portion above $1 million.
2. Aggregate Method: The bonus or commission is added to regular wages, and taxes are calculated using standard income tax rates.

It's important to note that while the withholding rates may differ from regular wages, bonuses and commissions are ultimately taxed as ordinary income when you file your annual tax return. The total amount of bonuses and commissions received during the year will be included with other earned income in Box 1 of your Form W-2.

The bottom line? What you see on that commission statement isn’t what you get. And trust me, nothing’s worse than that come payday.

Traditional Payroll Systems Make Sales Teams Want to SCREAM

As a sales guy, I’ve seen how traditional payroll handles (or mishandles) bonuses and commissions, and it’s painful.

1. Error City: Manual data entry = mistakes. And those mistakes = salespeople on the warpath. Nobody wants to fight for what they’re owed, especially when it was earned.
2. Time Suck: Chasing down payouts, verifying calculations, and then waiting for the check? Precious time that could be spent doing what everyone would prefer, selling.
3. Compliance Nightmares: Keeping up with ever-changing tax rules is a full-time job in itself. And the risk of getting it wrong? Huge.
4. Reporting in the Dark Ages: Want to actually understand what’s driving your best (and worst) performers? Traditional payroll systems leave you flying blind.

The Future is (nearly) Here: Sales-Focused Payroll Powered by Rollfi

That’s where Rollfi comes in. We can help build the future of payroll for sales teams. Imagine this:

1. Commission Nirvana: Fully automated calculations that handle any comp plan and integrate tightly with payroll to make payout fast and easy.
2. Immediate Bonuses: Real-time bonus processing and payment, so you can reward top performers instantly and keep the momentum going.
3. Smart Tax Withholding: Making sure the right amount is withheld, every time, to keep everyone happy (and compliant).
4. Powerful Insights: Integrated reporting that gives you a crystal-clear view of sales performance, compensation costs, and more.

CaptivateIQ, Spiff, and the Obvious Next Step

Companies that are crushing it in the sales commission space, like CaptivateIQ, Spiff, and their competitors, are sitting on a goldmine. They’ve already got the commission calculation down, adding payroll is a natural evolution. By integrating with Rollfi's embedded payroll solution, they can offer their clients a one-stop shop for sales performance and compensation. 

About Rollfi

Rollfi provides the fastest way for Banks, Vertical SaaS companies, Accounting Firms, and Fintechs to integrate payroll and benefits into their offerings through our white-label solutions + robust APIs. By leveraging Rollfi’s infrastructure, businesses can unlock new revenue streams, increase customer retention, and access valuable payroll data insights. With rapid deployment and comprehensive coverage, Rollfi transforms your platform into a one-stop-shop for essential services, driving growth and enhancing customer satisfaction.