Paying Back a Recoverable Draw: Repayment Math & Schedules

Key takeaways

• A recoverable draw is an advance. When a rep earns less than the draw, the shortfall becomes a balance they owe.
• The balance is paid back out of commission above the draw in later periods. The rep still takes home at least the draw each period.
• Your plan decides two things: whether recovery takes all of the commission above the draw or only a share of it, and whether an unpaid balance carries forward or is forgiven.
• When a rep leaves, collecting the balance is limited. California only lets you recover a draw from commissions as they come due, and a federal appeals court struck down a policy that required repayment at termination.
• Recovering a draw from later commission needs no tax correction. A rep paying cash back to you does.

What is a recoverable draw?

A recoverable draw is an advance against future commission. Say a rep has a $3,000 monthly draw and earns $1,900 in commission. You pay them $3,000. The extra $1,100 isn't a bonus. It's a balance they pay back from future commission.

A non-recoverable draw is a guaranteed minimum instead. The rep keeps the shortfall, and nothing is owed.

When does repayment start?

A balance starts the first period a rep earns less than the draw. Repayment starts the first period they earn more than the draw. Only the commission above the draw is used. The draw itself is never taken back out of a paycheck.

Each period works like this:

• Advance = draw − commission earned, when commission is short. This is added to the balance.
• Excess = commission earned − draw, when commission is over. This is what's available to repay the balance.
• Recovered = the part of the excess your plan applies to the balance.
• Pay = commission + advance − recovered.

So the running balance is:

Balance after = balance before + advance − recovered − anything forgiven

That's the whole formula. A common mistake is adding the full draw to the balance every period. That makes a rep who hits their number look like they owe money.

How is the balance paid back: full recovery or a cap?

Plans recover the balance in one of two ways.

Full recovery. All commission above the draw goes to the balance until it's paid off. The rep takes home exactly the draw until the balance is cleared.

Capped recovery. Only a share of the commission above the draw goes to the balance, for example half. The rep sees a bigger check sooner, and the balance takes longer to clear.

Neither one is more correct. Your plan document decides, and it should say so before the first draw is paid.

Here is the same rep under both. The draw is $3,000 a month, recoverable, and the balance carries forward. The cap is half of the commission above the draw.

Full recovery

Capped at half the commission above the draw

Walk through month 3. Commission is $4,500, so the excess above the draw is $1,500.

• Under full recovery, all $1,500 goes to the balance. The rep is paid $3,000 and the balance drops from $1,700 to $200.
• Under the cap, half the excess ($750) goes to the balance. The rep is paid $3,750 and the balance drops to $950.

In month 4, full recovery only needs $200 to finish. The rest of the excess is paid to the rep.

What if the balance doesn't carry forward?

Some recoverable draws only reach back one period. Whatever the next period's excess can't repay is forgiven.

Take month 2 above with carryover off. The rep starts with $1,100 owed and earns $2,400, which is under the draw. There's no excess, so nothing is recovered. The $1,100 is forgiven, and the new balance is just this month's $600 advance.

Carryover off is gentler on the rep and simpler to explain. Carryover on protects you when a rep has a long slow stretch. Pick one and write it into the plan.

What happens when a deal is refunded?

A refund takes back commission that was already earned. Your plan has to say where that clawback goes, because it changes what the rep owes.

Say a rep has a $1,400 draw, earns $900 in commission, and a $500 refund hits in the same period.

• Option A: the refund comes off commission before the draw. Net commission is $400, so the advance is $1,000. The whole $1,000 sits in the draw balance.
• Option B: the refund is a separate clawback. Commission stays at $900, so the advance is $500. The $500 refund is recovered on its own, outside the draw.

The total is $1,000 either way. The difference shows up later. Under option A, if the draw is non-recoverable or the balance is forgiven, the refund disappears with it. Under option B, the clawback stays owed no matter what happens to the draw.

Do reps have to repay a draw when they leave?

Your agreement can say the balance is due when a rep leaves. Collecting it is a different matter, and it depends on where the rep works and how they're paid. This is general information, not legal advice. Check with employment counsel before you write or enforce a repayment clause.

California. The state's Division of Labor Standards Enforcement says a draw against future commissions "is only recoverable from the commissions as they become due." An employer can't take excess draws out of a final paycheck unless that final pay is itself commission. Even then, it can never cut into a minimum wage or a contractual minimum. If the agreement provides for it, the employer could sue to recover the balance instead. (DLSE opinion letter, May 16, 1991)

Federal law for non-exempt employees. The Fair Labor Standards Act requires minimum wage to be paid "free and clear" (29 CFR 531.35). In Stein v. hhgregg (6th Cir. 2017), the court allowed recovering draws from commissions earned later. It also held that a policy requiring reps to repay their draw balance when they left violated the FLSA, even though the employer never enforced it. (SHRM summary, Parker Poe summary)

1099 contractors. Wage-deduction rules don't apply. Repayment is whatever the contractor agreement says, so put the draw, the recovery method and what happens to a balance at the end of the contract in writing.

If you don't plan to collect a balance when a rep leaves, say so in the plan. As Stein shows, a repayment clause you never enforce can still create a claim.

Are draw repayments taxed differently?

For W-2 reps, a draw is wages when you pay it, taxed like any other pay.

Recovering the balance from later commission doesn't need a tax correction. The advance was already taxed when it was paid, and each later check is taxed on what you actually pay. Over time, the rep's taxable wages equal what they took home.

It's different when a rep pays cash back to you. IRS Publication 15 covers these as wage repayments (Pub. 15, section 13, Wage Repayments):

• If the repaid wages were paid in an earlier quarter of the same year, you adjust income tax withholding and Social Security and Medicare taxes on Form 941-X.
• If they were paid in a prior year, you can recover only the Social Security and Medicare taxes. You also file a W-2c. The wages stay taxable to the rep for that year, and the rep may claim a deduction or credit in the year they repay.

For 1099 contractors there's no withholding. The draw and any repayment are just amounts on their bill. Confirm the treatment with your payroll provider before the first repayment.

How should you track draw balances?

One row per rep per period, with these columns:

• Draw for the period
• Commission earned
• Advance paid (shortfall)
• Recovered (from the excess)
• Forgiven
• Balance before and balance after

Every row should balance: balance before + advance − recovered − forgiven = balance after. If a row doesn't, something was keyed in wrong.

The commission column is where errors creep in. It has to match closed-won deals in HubSpot for the period. If you pay on cash collected, it has to match payments actually received. Reconcile it every period, before payroll, and check for refunds.

A spreadsheet works for two or three reps on draws. With more, plus splits, ramps and mid-period plan changes, you end up keeping a separate spreadsheet for each rep, reconciled by hand every period.

How CommissionIQ handles draws

In CommissionIQ, a draw is part of the base pay section of a comp plan. You set the monthly amount, recoverable or non-recoverable, and whether the balance carries forward.

Each period, CommissionIQ:

• Prorates the draw by days, the same way it prorates base pay.
• Measures the rep's commission for the period against it.
• Pays any shortfall as an advance and adds it to the balance.
• Recovers from commission above the draw, up to the balance owed.
• Forgives what your settings say to forgive.
• Writes a ledger row that explains itself, like "Draw $3,000; commission $1,900; advanced $1,100; balance carried $1,100".

Every row balances using the formula above.

Three things to know before you rely on it:

• Recovery is full, not capped. CommissionIQ applies all commission above the draw to the balance until it's repaid. There's no setting to recover only a share.
• Refunds work like option B. A refund goes to the clawback queue, sized to the exact payment the rep was paid on, and nothing reverses until you approve it. It doesn't change the draw balance.
• It doesn't collect a balance when a rep leaves. The ledger shows what's owed. What you do about it is up to your agreement and your state's law.

CommissionIQ calculates commission and creates bills in QuickBooks. It doesn't run payroll, so W-2 pay still goes out through your payroll provider.

If you're comparing tools, run one real draw period during a trial. Check that the balance carries the way your plan says, that recovery only comes from commission above the draw, and that you can see each period's math. Our comparison of commission software for HubSpot covers the other options.

FAQ

Should a 1099 contractor sign a separate draw agreement?

Put it in the contractor agreement, whether that's a separate document or a section. It should state the draw amount, how it's recovered, whether a balance carries forward, and what happens to a balance when the contract ends. Wage-deduction rules don't apply to contractors, so the agreement is the only thing that governs repayment.

Can I change the recovery method partway through?

Only the way your plan allows. Changing from full recovery to a cap, or switching carryover off, changes what a rep is paid. Amend the plan in writing and get the rep's signature before the next payout. Apply the change going forward, not to periods you've already paid.

What happens if a rep's balance never reaches zero?

At the end of the plan, the balance is either forgiven or collected under the agreement. Your plan should say which. Collection at separation is limited by state and federal law, as covered above, so forgiveness is the common outcome.

Does a refunded deal change the balance?

It depends on whether refunds come off commission before the draw is measured (option A above) or are clawed back separately (option B). Under option A, a refund in a short period raises the draw balance. Under option B, it's a separate amount owed.

How often should draw balances be reconciled?

Every payout period, before payroll runs. Check commission earned against closed-won deals or collected payments in HubSpot, confirm that every row balances, and look for refunds that landed since the last run.