Illustration: Hoi Chan
It’s important to understand the differences between salary vs. hourly pay, whether you’re an employer or employee. Knowing the pros and cons will help you decide which option suits you or your business best.
Salary vs. hourly pay: What’s the difference?
In the U.S. most people get paid either through a salary or hourly pay. The main difference between the two is that a salaried income is set in advance, while hourly pay fluctuates depending on the amount of time you work.
What does it mean to have a salary?
No matter how many hours they work, salaried staff are paid a set amount. Salaried positions are mainly full-time roles, and pay is calculated as an annual figure. This is divided equally across the year’s payments, which are usually made weekly, bi-weekly or monthly.
Salary figures are wide-ranging. They can depend on an employee’s education, experience and the sector they work in.
Paid vacation, health insurance and a 401(k) retirement plan (in the case of the U.S.) are some of the company benefits salaried workers can receive.
What does it mean to work an hourly rate?
Employees on an hourly wage get paid an agreed-upon rate for each hour they work. Hourly workers in the United States must receive the state or federal minimum wage—whichever is highest.
People on an hourly wage record the hours they work using timesheets or time card systems. They aren’t guaranteed a set number of hours each week, unless protected by a labor contract. This means income can vary.
Some hourly workers will receive company benefits, but this depends on their employer. However, the employer’s contribution will often be lower than that provided to salaried employees.
Salary vs. hourly overtime laws
In most situations salaried workers in the U.S. are classed as exempt employees and aren’t entitled to overtime pay. According to the latest U.S. Fair Labor Standards Act (FLSA) rules, employees are considered exempt if they receive a salary, earn more than US$684 per week/$35,568 a year, and perform duties classed as executive, administrative, professional, computer or outside sales.
However, some employers offer overtime or time off in lieu to salaried staff. In addition, several states have laws that allow a greater number of salaried employees to receive overtime pay. U.S. workers can check with the Department of Labor to find out where their state stands.
Under the FLSA, hourly-paid workers are usually classed as non-exempt employees and are entitled to overtime pay—at a rate of at least time and a half—for anything over the standard 40-hour work week.
Are salary vs. hourly staff taxed differently?
In the U.S., salaried and hourly employees receive a similar tax form from the Internal Revenue Service (IRS) every year. Known as W-2 Hourly and W-2 Salaried, both types of employee need to provide the same information, and the employer deducts the tax from the hourly pay or salary. The rate of tax is the same for both salaried and hourly-paid staff.
As an employer, you pay tax according to the total amount on your payroll—whether salaried employees, hourly workers or both.
Advantages and disadvantages of salary-based pay
Each type of pay has its own advantages and disadvantages. Here we look at the pros and cons of salary-based rates for both employers and employees.
There are many advantages to choosing a salary-based income, from consistent pay to a variety of company benefits.
- Consistent paycheck: Each paycheck is the same for salaried employees, providing a level of income security.
- Higher income: Salaried employees—even those just starting out—are often paid more than their hourly counterparts They’re also more likely to receive financial perks like bonuses.
- Eligibility for company benefits: Salaried employees are eligible for a number of company benefits such as parental leave, health, dental, life insurance and a 401(k) retirement plan.
- Paid time off: Salaried workers get an annual vacation allowance.
- Higher status: Those on a salary are often perceived to be of a higher status and given more professional job titles than their hourly-working counterparts. This type of role often comes with more authority, responsibility and influence, and staff can feel more invested in the company.
- Training and career advancement opportunities: Salaried employees usually have access to professional development support from their employers, which can help them climb the career ladder.
- Lower turnover: For employers, better employee retention means reduced training and recruitment costs, and increased overall productivity.
- Minimal overtime costs for employers: There usually isn’t overtime pay for salaried employees. This can save the business money.
- Employers can better predict finances: Because wages and taxes remain constant from month to month, it’s easier for businesses to predict their future finances and budget accordingly.
It’s not all rosy; there are several downsides to a salaried income.
- Potentially longer work hours: Salaried workers may be expected to work longer hours to get their work done—and for no extra money—if the job requires it.
- Can be harder to separate work and personal life: It can be harder for full-time employees to keep their personal and work lives separate. This is because they may be expected to work late or to take work home with them.
- More stressful: Longer hours and a pressure to perform mean salaried roles can be more stressful.
- Unlikely to receive overtime pay: The majority of salaried employees aren’t entitled to overtime pay, meaning they won’t get any extra money if they need to work more than their contracted hours to complete a job.
- Can miss bonuses: Yes, one of the pros of being on a salary is the chance to gain bonuses, but miss a target and that opportunity disappears.
- Less autonomy over vacation days: Salaried employees get a set amount of annual vacation leave. They must get approval for any days off from their manager.
- Reduced potential from earning more from additional jobs: As a full-time salaried employee, you lose the flexibility to take on other jobs or opportunities.
Advantages and disadvantages of hourly-based pay
These are the advantages and disadvantages of being an employee on an hourly rate.
Working hourly does have its benefits. Check out these pros:
- Overtime compensation: Hourly workers are entitled to overtime pay, meaning they get paid for every hour they work—unlike their salaried counterparts. The overtime rate is usually time and a half, but this can be higher still for public holidays, potentially leading to double pay.
- Cheaper for employers: Employees paid hourly can save employers money as they only pay for the hours of work they need. In addition, employers save money by providing hourly workers with less company benefits, or none at all.
- Clarity of labor hours and costs: It’s easier for employers to calculate the cost of labor by tracking employees on an hourly rate.
- Encourages employees to work extra hours: An hourly rate encourages people to work harder and longer, as they’ll benefit from the extra work they do. This can be beneficial for the business.
- Autonomy over schedule and employer: Hourly workers can choose when and where they work, and in some ways it can be easy to make changes.
- Ability to dedicate time to other interests. Once they’ve worked their agreed-upon hours, those on an hourly wage are free to walk away and spend time with friends and family, enjoy a hobby, further their education or even take a second job to boost their income.
- Less responsibility: Hourly workers usually have less responsibilities and potentially less obligations and liabilities compared to their salaried counterparts.
There are also several cons to consider when weighing whether an hourly wage is the right choice for you.
- Inconsistent paycheck: Unless they have a labor contract that says differently, workers paid hourly often see their work hours change from week to week, especially if tied to a shift schedule. This means income can fluctuate, making them less financially secure.
- Overtime is not a given: Not all companies will offer overtime, which can limit the ability to earn.
- More vulnerable to economic crises: In difficult times, hourly workers may be more vulnerable than their salaried counterparts, as it’s easier for employers to cut hours than dismiss contracted staff.
- Fewer company benefits: When it comes to bonuses, retirement plans and healthcare, hourly workers often have less, or lower-quality company benefits than their salaried counterparts.
- Typically don’t have paid time off: If you’re ill or want to take a holiday, as an hourly worker you’re likely to have to take that time unpaid.
- Considered less important: Some consider hourly workers easier to replace, and they’re often less valued than salaried staff.
- Can restrict employers’ access to talent: An hourly rate can put highly skilled people off applying, as many workers are looking for job security and opportunities.
- Less job security for the employee: Hourly workers that don’t have a work contract (which is often the case in the U.S.) can often be instantly dismissed, no matter how long they’ve worked for the business.
- Less employee security for the employer: On the flip side, employers face a similar issue, as hourly-paid employees can leave without giving any notice.
For employers: How to decide between an hourly wage and a salary
There are several tools available to employers to help them understand whether it’s more advantageous to employee workers on an hourly or salaried basis.
Salary vs. hourly calculator
Employers might find it useful to convert a part-time (hourly) worker’s hours to their full-time equivalent (FTE) using a contract hourly rate vs. salary calculator. This allows them to see how many full-time (salaried) staff they equate to.
This type of analysis enables a business to see the total cost of an employee, compare headcounts to revenue and profits, and attain a better understanding of labor and overtime costs. This can help the company determine whether it can afford to hire someone new, and also what type of worker it needs.
Calculate your full-time equivalent using the Toggl Track FTE calculator.
Time tracking can also be a useful tool for employers. Companies can use it to identify how many hours both salaried and hourly rate employees are working, and how that time is being spent.
As well as helping employers better understand how long projects take and how much work is involved, time tracking can also enable businesses to see if work is being allocated in the best way. Companies may discover that they can save money by switching some workers over from hourly pay to salaried, or vice versa.
Conversely, employees can use time tracking to work out how much they’re getting paid, and whether they’re on the most suitable type of pay.
Salary vs. hourly: Understand what’s right for you
Both employers and employees should take the time to learn the differences between hourly vs. salary pay. By doing so, both parties can ensure they choose the option that best suits their needs.
Each approach has its pros and cons, but these will differ depending on the needs and finances of the business or individual. Some people prefer the flexibility of hourly pay and the opportunity to earn more, while others prefer the security of a stable income and fixed hours. For businesses, putting employees on the most suitable type of payment can save money and enable growth.