Are sales commissions direct costs?
Sales commissions are typically considered direct costs when they’re tied directly to the sale of a specific product or service. Because these costs are incurred as a direct result of generating revenue, they’re often recorded under Cost of Goods Sold (COGS) or Cost of Sales rather than as general operating expenses.
What are sales commissions?
Sales commissions are payments made to sales staff or representatives based on the revenue they generate or deals they close. Since they’re directly linked to individual sales transactions, commissions are viewed as variable costs; they rise or fall depending on how much the company sells.
How to categorize sales commissions
- Record as Direct Costs when commissions are paid per sale or directly linked to revenue.
- Include under Cost of Goods Sold (COGS) or Cost of Sales in your income statement.
- For commissions not tied to specific transactions (e.g., managerial or referral bonuses), categorize them as Operating Expenses under “Selling Expenses.”
- Track commissions separately from base salaries for better profitability analysis.
- Use accrual accounting to recognize commissions when the related sale is made, not when the payment is issued.
Examples of sales commission expenses
- Commissions paid to in-house or independent sales reps per sale.
- Performance bonuses based on sales volume or revenue targets.
- Referral or affiliate commissions tied to specific customer transactions.
- Channel partner or distributor incentives.
- Sales overrides paid to managers based on team performance.
Tax implications for sales commissions
- Sales commissions paid to employees are deductible as ordinary business expenses.
- Commissions tied to specific sales reduce taxable income as part of COGS or direct selling costs.
- Commissions paid to independent contractors must be reported on Form 1099-NEC.
- Ensure proper documentation, including commission agreements, payroll records, and invoices, to substantiate deductions.
- For accrual-based businesses, commissions are deductible in the period when the related sale occurs, not necessarily when paid.
