What Is a Commission?

What Is a Commission?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A commission is a service charge generally expressed as a percentage of the total cost of a transaction, typically paid to agents, brokers, or companies for their role in facilitating a business deal. For example, real estate agents earn a commission when they successfully help a client buy or sell a property. The commission value can vary based on numerous factors including the nature of the transaction, industry standards, and specific company policies.

Related Questions

1. How is a commission calculated?

Commission is typically calculated as a percentage of the total transaction value. For instance, if a broker charges a 5% commission on a $10,000 sale, the commission would be $500.

2. Is commission paid before or after tax?

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Commission is usually paid before tax. The payer deducts the commission from the gross amount and then calculates tax based on the remaining balance. It means the person receiving the commission will need to consider it as income and is responsible for any tax obligations on that income.

3. Do all industries use commission-based payment?

No, not all industries use commission-based payments. This method is common in sales, real estate, finance, and insurance sectors. These industries use commissions as incentives to motivate employees or agents to close sales or deals.

4. Is commission income stable?

Commission income can be unpredictable because it is based on sales performance and can vary from month to month. During successful sales periods, commission-based workers can earn more than their base salary, but during slow periods, their income may decrease.

5. Can an employee earn a salary and commission?

Yes, some employees earn both a base salary and commission. This is known as a ‘mixed’ or ‘hybrid’ compensation structure. Here, the salary provides a stable income, while the commission serves as an incentive for performance.