Carrier statements drive the books
Each carrier sends a commission statement listing policies, premium, commission rates, adjustments and the net payment. Record the total commission earned and any adjustments in separate lines rather than only the deposit. Many agencies use an agency management system to reconcile statements, and then post a monthly summary by carrier to the accounting file. Keep each statement as the source document for its deposit.
New business, renewals and chargebacks
Commissions on new policies and renewals have different rates and patterns, and tracking them separately shows how much of your income is repeat business. When a policy cancels early, the carrier can claw back commission. Record chargebacks as reductions of revenue, or in a clearly labeled account, and watch them by producer and by carrier. A high chargeback rate might signal a sales or underwriting problem.
Premium trust money
If your agency collects premium from clients and passes it to carriers, the money is held in a fiduciary capacity. State insurance rules usually require it to be kept in a separate premium trust account, and prohibit using it for agency expenses. Ask your state insurance department or counsel about the specifics. Reconcile the trust account every month, and tie its balance to what you owe carriers.
Producer pay and contractors
Producers may be employees paid salary plus commission, or contractors paid a split. Record their compensation based on the agreement, and collect W-9 forms from contractors. Keep licensing and continuing education costs for each producer on a list with renewal dates. Appointment fees paid to carriers and errors and omissions insurance are regular costs.
Bonuses, profit sharing and timing
Carriers may pay contingent or profit-sharing bonuses once a year, long after the policies were written. Because of that timing, your monthly results can look uneven. Decide with your CPA whether to record these when received or accrue them when you can estimate them reliably. Meanwhile, maintain a cash reserve so a slow month does not interrupt payroll.
Review commission income by carrier, line of business and producer each quarter. If a handful of carriers produce most of the revenue, that concentration is a risk worth discussing, since changes to a commission schedule or an appointment can shift your income quickly.
Reconciling a month of commissions
At month end, list every carrier statement received and every statement still expected. Missing statements are a quiet source of lost income, since a carrier may pay late or skip a policy. Compare the commission on each statement with what your agency system predicted. Differences of a few dollars can be ignored, but repeated gaps from one carrier deserve a call to the carrier's agency support line.
Also compare producer-level commissions to what you pay out. If a producer is paid on written premium before the carrier pays you, the timing creates a cash gap that should be planned for.
Worked example with numbers
A carrier statement shows $2,400 of commission, a $300 chargeback for a canceled policy, and a net deposit of $2,100. Record commission income of $2,400 and the chargeback as a reduction of income in the same period. Producers are paid a 40% share of the commission on a policy: $2,400 x 40% = $960, with the chargeback reducing the producer's share by $120 if your agreement says so.
If you recorded only the $2,100 deposit, you would not see how much of your revenue is being clawed back by cancellations.
Mistakes that cost money
Booking net deposits only. Mixing premium trust funds with operating cash, which many states regulate. Missing chargebacks. Paying producers before the carrier pays you.
Check your work
Tie each carrier's statement to the deposit and to the commission report from your agency system, every month.
Common questions
Is premium I collect my income?
No. Only the commission is agency income. Premium belongs to the carrier or the client until forwarded.
Should I accrue renewals I expect?
Many agencies use cash basis and track expected renewals in a report. Ask your CPA which method suits your agency.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.