A strong sales team is the driving force of most small to midsize businesses. Strong revenue streams are hard to come by without skilled and engaged salespeople.

But what motivates these valued employees? First and foremost, equitable and enticing compensation. And therein lies a challenge for many companies: Choosing the right sales compensation model isn’t easy and may call for regular reevaluation. Let’s review some of the most popular models and note a recent trend.

Straight salary (or hourly wages)

The simplest way to pay sales staff is to offer a “straight salary,” meaning no commissions or other incentives are involved. (Some businesses may pay hourly wages instead, though this generally occurs only in a retail environment.)

The straight salary model’s advantage is that it’s easy for the company to administer and keeps payroll expenses predictable. It also provides financial stability for employees. The approach tends to work best in industries with long sales cycles and for particularly collaborative sales teams.

As you may have guessed, the downside is that it offers no financial incentive for salespeople to go beyond the status quo. This can result in flat sales and difficulty drawing new customers.

Commission only

Quite the opposite is the commission-only model. Here, sales team members earn income as a predetermined percentage of sales revenue. There are various ways to do this, but the bottom line is that staffers are compensated purely through sales wins; they don’t receive salaries.

The advantage is that they’re strongly motivated to succeed — one could even say it’s a “do or die” approach. This model often suits start-ups or businesses looking for quick growth without a big payroll budget. The risk for companies is that commission-only positions tend to have high turnover rates because salespeople lack income stability and may change jobs frequently.

Salary plus commission

Traditionally, this has been among the most popular compensation models. It combines the stability of a salary with the financial incentive of commissions. Generally, the salary will be relatively lower because sales staffers can make up the difference through the commissions.

For the business, this model may reduce turnover while still helping motivate employees. Its chief downsides are that salaries add to payroll expenses, and there’s a relatively high degree of administrative complexity involved in tracking and calculating commissions.

Salary plus performance-based incentives (hybrid)

If you’re interested in “what’s hot” in sales compensation, look no further. This model is often called “hybrid” because it combines a salary with various performance-based incentives tailored to the company’s needs.

Just last month, cloud-based sales software provider Xactly released the results of its annual Sales Compensation Report. Of 160 companies surveyed, 62% identified performance-based pay structures for sales reps as the biggest factor driving changes to sales compensation.

Like “base salary plus commission,” a hybrid model offers employees income stability — but it allows them to earn much more through multiple incentives. For businesses, the model may strengthen employee retention while motivating sales team members to meet targeted strategic objectives, such as increasing market share or driving top-line growth.

Companies have a wide variety of performance-based incentives to choose from, including:

• Financial bonuses for acquiring new customers or expanding into new territories,
• Profit-sharing plans that tie additional compensation to the company’s overall success, and
• Long-term incentives, such as stock options, restricted stock units and performance shares.

However, it’s critical to design a hybrid model carefully. One major risk is becoming “a victim of your own success” — that is, running into cash flow problems because you must pay salespeople substantial amounts for earning the incentives offered.

No pressure

If your sales compensation model works well, don’t feel pressured to change it just to keep up with the Joneses. However, as your business grows, you may want to adjust or revise it to sustain or, better yet, increase that growth. We can help you evaluate your current model and make necessary adjustments that fit your company’s needs and budget.

© 2025

As we approach 2025, changes are coming to the Social Security wage base. The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $176,100 for 2025 (up from $168,600 for 2024). Wages and self-employment income above this amount aren’t subject to Social Security tax.

If your business has employees, you may need to budget for additional payroll costs, especially if you have many high earners.

Social Security basics

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other is for Hospital Insurance, which is commonly known as the Medicare tax.

A maximum amount of compensation is subject to the Social Security tax, but there’s no maximum for Medicare tax. For 2025, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2024).

Updates for 2025

For 2025, an employee will pay:

• 6.2% Social Security tax on the first $176,100 of wages (6.2% × $176,100 makes the maximum tax $10,918.20), plus
• 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
• 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).

For 2025, the self-employment tax imposed on self-employed people will be:

• 12.4% Social Security tax on the first $176,100 of self-employment income, for a maximum tax of $21,836.40 (12.4% × $176,100), plus
• 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
• 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

History of the wage base

When the government introduced the Social Security payroll tax in 1937, the wage base was $3,000. It remained that amount through 1950. As the U.S. economy grew and wages began to rise, the wage base needed to be adjusted to ensure that the Social Security system continued to collect sufficient revenue. By 1980, it had risen to $25,900. Twenty years later it had increased to $76,200 and by 2020, it was $137,700. Inflation and wage growth were key factors in these adjustments.

Employees with more than one employer

You may have questions about employees who work for your business and have second jobs. Those employees would have taxes withheld from two different employers. Can the employees ask you to stop withholding Social Security tax once they reach the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from an employee’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employees will get a credit on their tax returns for any excess withheld.

Looking ahead

Do you have questions about payroll tax filing or payments now or in 2025? Contact us. We’ll help ensure you stay in compliance.

© 2024