Page 171 - Accounting Best Practices

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Commissions Best Practices
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other special arrangements to get the money to them. Depending on the number
of checks, this can interfere with the smooth functioning of the accounting
department.
A simple but effective way to avoid this problem is to roll commission pay-
ments into the regular payroll processing system. By doing so, the payroll calcu-
lation chore is completely eliminated, once the gross commission amounts are
approved and sent to the payroll staff for processing. The system will calculate
taxes automatically, issue checks or direct deposits, or mail to employees,
depending on the distribution method the regular payroll system uses. This com-
pletely eliminates a major chore.
There are two problems with this best practice. One is that the commission
payment date may not coincide with the payroll processing date, which necessi-
tates a change in the commission payment date. For example, if the commission
is always paid on the fifteenth day of the month, but the payroll is on a biweekly
schedule, the actual pay date will certainly not fall on the fifteenth day of every
month. To fix this issue, the commission payment date in the example could be
set to the first payroll date following the fifteenth of the month. The other prob-
lem is that by combining a salesperson’s regular paycheck with the commission
payment, the combined total will put the employee into a higher pay bracket,
resulting in more taxes being deducted (never a popular outcome). This issue can
be resolved either by setting employee deduction rates lower or by separating the
payments into two separate checks in the payroll system in order to drop the
payee into a lower apparent tax bracket (though most payroll systems do not have
this feature). As long as these issues are taken into account, merging commis-
sions into the payroll system is a very effective way for the accounting staff to
avoid cutting separate commission checks.
Cost: Installation time:

8–7 LENGTHEN THE INTERVAL BETWEEN
COMMISSION PAYMENTS

Some commissions are paid as frequently as once a week, though monthly pay-
ments are the norm in most industries. If there are many employees receiving
commission payments, this level of frequency results in a multitude of commis-
sion calculations and check payments over the course of a year.
It may be possible in some instances to lengthen the interval between com-
mission payments, reducing the amount of commission calculation and paycheck
preparation work for the accounting department. This best practice is only useful
in a minority of situations, however, because the commissions of many sales per-
sonnel constitute a large proportion of their pay and they cannot afford to wait a
long time to receive it. However, there are some instances where salespeople