Salary vs. Hourly Pay: What Are the Differences?February 14, 2020
There are several differences between salaried and hourly positions. The most distinct difference is the way these positions receive pay, both of which have their advantages and disadvantages. When looking for a new job, compensation is a deciding factor for many people. As a result, understanding the difference between salary or hourly pay can be helpful.
In this article, we will discuss the differences between hourly and salary pay as well as which method is best for you.
What is an hourly rate?
Your hourly rate is the amount of money that you receive for each hour you spend working. As an hourly employee, you should get paid for all of the hours that you work. If an employer wants more of your time, they’ll have to pay you more. For example, if you work for 25 hours and 30 minutes, you’ll get paid for 25.5 hours. If your hourly rate is $17.50, you’ll receive $446.25 for your time: $17.50 x 25.5.
What is a salary?
Salary is a consistent payment to an employee based on working a full-time position. Employers typically usually distribute salaries on a monthly or bimonthly basis, but some businesses pay salaries out annually. The amount and frequency of your pay should be part of your employment contract.
Each salary payment is a fixed amount. For example, you’ll get $5,000 per month before taxes with a salary of $60,000 per year before taxes. This is called gross pay, and the amount after taxes is net pay.
Read more: What is Gross Pay?
Many large employers have a set salary range for each position. Salary range is typically determined by comparing the industry averages based on position type, level and location. Salaries are also related to your education, your previous experience and the amount of time you’ve worked for a company. Salary ranges are also impacted by supply and demand. Typically you can get better offers in areas with multiple vacancies for jobs similar to yours.
The benefits and downsides
Salaried and hourly compensation methods have different benefits. Some individuals prefer hourly positions while others may look for positions with salaries depending on their industry, needs and schedule. Let’s explore a few of the benefits and disadvantages of both types of pay.
Benefits of salary pay
Receiving a regular salary can be better than an hourly job for several reasons:
Consistent paycheck. Salaried employees get a set amount from their employers consistently. Every check is the same, even if there’s a holiday. You can also use sick days if needed without having your paycheck reduced. A steady income can reduce stress and allows more flexibility when you have unexpected expenses.
More benefits. Full-time, salaried employees are likely to get additional employment benefits such as health care, matching contributions to a 401(k) and paid vacation time. Even if a salaried job with benefits pays less than an hourly job, it could put you in a better financial position. Perks such as maternity or paternity leave, gym membership reimbursements or free childcare can provide significant savings.
More career advancement opportunities. Generally, a salaried position comes with more responsibilities than an hourly job. Even if you accept a pay cut to move from an hourly to a salaried role, it could be worth it in the long term. In addition to added benefits like health insurance, you could be promoted to a more advanced position more quickly than an hourly employee. Roles in management, for example, are typically required to be full-time employees.
Disadvantages of salary pay
Per federal law, businesses have to pay hourly employees overtime for hours worked in excess of 40 hours per week. They can still require salaried employees to work as long as it takes to get the job done. There’s no additional compensation for additional hours, so a demanding boss could easily keep you at work with additional tasks.
Benefits of hourly pay
Working an hourly position can certainly be more beneficial in some cases. Here are some benefits to receiving hourly wages:
Overtime compensation. Most businesses use a time tracking system that pays employees by the minute, so, if you receive hourly pay, you should be compensated if you need to stay at work late. Since federal law requires overtime for hourly employees, you could make hundreds of additional dollars per week if your job needs you for more than 40 hours a week during a busy time.
Opportunity for holiday pay. Overtime typically is time and a half, but some employers will pay double or even triple time for holidays such as New Year’s Eve. If you work in a field where overtime is common, you may earn more than you would if you had a salaried position with comparable pay. Overtime work and the extra pay associated with it is not necessarily guaranteed. You should make sure that it (and any other promised benefits) are part of your contract before you accept a job offer.
Ability to dedicate time to other interests. Having an hourly position allows you to schedule for other interests like improving skills, going to school, starting your own venture or working another full or part-time job.
Disadvantages of hourly pay
The income of an hourly employee might be more vulnerable to changes. Hourly positions typically feel the impact of a poor economy or economic downtown in their industry first. Many businesses choose to reduce the hours for hourly employees instead of laying off salaried employees. For example, someone getting hourly pay who usually works 40 hours per week could lose 25% of their normal wage if their boss decides to schedule them for 30 hours during weeks that aren’t busy.
Hourly employees can also be affected by missing their scheduled hours. For example, someone who is 10 minutes late for a job that pays $17.50 per hour will miss out on $2.92 before taxes.
In addition to losing money for tardiness, hourly employees don’t generally enjoy the same flexible hours as salaried employees. While a salaried employee will have a somewhat flexible schedule that typically allows for sick days and paid time off, an hourly employee must arrive and clock in on time to start their shift.
The Affordable Care Act requires businesses with 50 or more employees to help pay for health insurance for those who work 30 or more hours per week. Some companies have chosen to avoid this obligation by keeping each hourly employee from working more than 29 hours per week. If your employer decides to reduce your hours permanently, you could have to find a second job or an altogether new position. If you’re searching for jobs due to reduced hours, visit our guide on using the Indeed.com job search.
Learning about salary vs. hourly wage is essential, especially when you’re negotiating rates for a new job. Understanding the difference between a salary versus an hourly wage can help you choose the best position to suit your needs.