The sales commission functionality, part of the Incentive Compensation module in NetSuite, is robust with a solid feature set that supports varied compensation requirements. It allows you to easily pay commissions through the NetSuite payroll module or through standard Accounts Payable process (Vendor Bills). But what if you outsource your payroll processing to ADP, PayChex, Paylocity or another payroll processing service? How do you effectively process your commissions within NetSuite to support payment through the payroll provider?
Here’s the step-by-step process on how to make it work.
Step 1: Setup the Required Accounts
You will need to set-up a few new accounts if these do not already exist within your NetSuite environment. When setting up these accounts, pay particular attention to the account Type as this is critical to allowing the commission related transactions to be entered and processed properly.
Commissions Payable– This account will be used to record the liability of the commissions that are to be paid to the sales persons.
Commission Expense – This Account will be used to record the commission expenses.
Commissions Clearing – This account will be used to balance the commission payment in NetSuite to the payroll journal entry from the outsource payroll provider (more on this later). If you are using multiple currencies, set the currency to the currency in which you process your payroll.
Step 2: Approve the Commissions
Typically this process will be run after all sales transactions for the month have been processed. For example on July 6, 2015 you processed all the sales transactions for June 2015, you would Authorize Commissions for June 2015 by setting the Date to 6/30/2015, the posting period to June 2015 and the Date Eligible to 6/30/2015. You would then need to select the Account as the Commission Payable account previously created in step 1, and set the Expense Account to the Commission Expense account created in step 1. Select the check boxes for the applicable records to approve, then select Authorize. Bills will be created.
Step 3: Pay the Commissions
Normally commissions will be paid out to the sales persons on the next payroll run following the actual date in which commissions were approved. As such we will assume that commission will be paid out on July 15 during the outsourced payroll run. Therefore our transactions to pay commission will be dated July 15, 2015.
Part 1: Pay the Bills using the Commissions Clearing Account
Starting with the standard Pay Bills functionality, the A/P Account will be set to the Commission Payable account and the Account will be set to the Commissions Clearing account. Note that the Balance displayed should be zero as the Commissions Clearing account is being used as a true clearing account so any Bill Payments from the previous months’ commissions should have already been cleared during the previous payroll run. Set the date and posting period as needed. In this example it is being set to 7/15/2015 and July 2015 based on a payroll date of 7/15/2015. Select the approved Commission records to be paid, then select Save. Bill Payments will be created.
Part 2: Enter the payroll journal entry using the Commissions Clearing Account to represent the total commission amount paid as part of the outsource payroll transaction.
The final step in the process is to enter the journal entry for the outsourced payroll run and debit the Commission Clearing account.
Below is a simplified example of payroll journal entry that should be entered. For this example the journal entry would be dated 7/15/2015 with a posting period of July 2015.
Note that this is a simplified example of a payroll journal entry.
After the journal entry is posted, the balance in the Commissions Clearing account should be zero. You have now successfully paid, NetSuite created commissions using an outsource payroll provider without any customizations or additional modules (beyond the Incentive Compensation module).
This method of processing NetSuite sales commissions allows you to recognize the commission expense and commission liability as well as process the payment transactions easily along with your standard outsource payroll processing tasks with minimal additional effort.
For additional information on how to benefit from the NetSuite features you already own or find out about how a NetSuite solution can benefit your business, please contact us at 760.930.6400.