Paying Commissions

Summary

How to track and pay commissions in QuickBooks.

Question

I have a client who is using QuickBooks 2003 Contractors Edition. They have a number of sales reps who are paid 45% commission on all sales that are paid each month. These same sales reps also take a $100 draw against their commissions for each new job they bring in. The sales reps receive a 1099 at the end of the year for all commissions paid. They receive no other income from my client.

My question is this. How can I help my client to setup these sales reps so that the commission can be calculated (minus whatever draws they have taken for the month)? Should they be setup as employees, with no taxes withheld on the commissions, but the commission rate is set to 45%? How do I create one report that will show the sales for each sales rep, breaking each sale down so that each sale shows the actul percentages that are used to calculate the commission for that specific sale, and also showing all draws taken for the month?

My client would prefer to be able to do this on one report that is given to each sales rep with their commission check for the month.

An example might be helpful here.

Customer XYZ made a purchase of $10,000 for roofing repair work. $1,000 is taken from the $10,000 for overhead. $3,400 is taken from the $10,000 for materials. $1,600 is taken from the $10,000 for Labor costs. $750 is taken from the $10,000 for miscellaneous expenses related to the job. This leaves a total of $3,250 (as profit), from which the commission is paid to the sales rep. The sales rep took $400 in draws (for new business he/she brought in for during the month).

The commission should be $1,462.50 - $400.00, for a net commission of $1,062.50.

My client wants to be able to create one report (if possible) in QuickBooks that will show this type of information for each job that a sales rep receives commission on. Can this be done, and if so, how is it done?

Answer

First, here are the steps for tracking sales by rep, and paying commissions when a draw is given in advance.

1) Set up all the reps as VENDORS, and then also as REPS in the Sales Rep list.

2) Create a Service Item called Commissions, and point it to your Commissions Expense account. Enter 0.45 in the rate field on the item.

3) Set up an account called Prepaid Commissions (Other Current Asset), and set up an item (Comm. Advance) that points to it.

4) Set up 1099 tracking to include the expense accounts AND THE ASSET account you use when recording payments to these reps.

5) When you pay the initial $100, use the Comm. Advance Item.

6) When you record sales, use the "Rep" field on the Sales Receipts or Invoices. You'll need to customize the sales forms to expose this field.

7) At the end of the period, run a "Sales by Rep" report on the Cash Basis. This give you all sales generated by rep, and it only includes sales on which you've been paid.

8) For each rep, enter a Bill (or a Check) that uses the Commissions Item. Enter the total dollars they sold (from the report in #7) into the QTY field for that item. This multiplies the sales $$ by the commission rate (0.45) and the total amount of the transaction is the amount of commission to be paid.

9) On the second line of the Bill (or Check), enter the Comm. Advance Item and enter a negative 100 in the amount field.

Now for the harder part, and for the "workaround" you need.

Since you only pay commissions on the PROFIT from the job, you have a few choices.

1) Use separate invoices for the profit portion of the job, and only record the rep name on those. Then use the same steps as above.

2) Use one invoice, but split the profit out onto a separate line of the invoice. Then, you'll need an item called something like "Profit" to filter your Sales by Rep report so that only the Profit Item shows on the report.

3) If you know that the profit on each job is a certain percentage of the total, multiply that percentage before you enter the total sales into the QTY field as discussed in step 8.