Salary vs. Hourly Pay: Difference and Pros & Cons of Each
In the US, there are two main ways to earn a wage. These are earning a salary and getting paid hourly. There are pros and cons of both ways of running payroll. In this informative guide, we’ll discuss salary vs. hourly pay in detail, highlighting the advantages and disadvantages and explaining how both systems work.
What Is a Salary?
Most people who have a job in the US are salaried employees. A salary is an annual wage paid monthly, biweekly, or weekly.
So, how do salaries work? If you receive a salary, you’ll get consistent payments in exchange for working a set number of hours. The amount of money you earn, the number of hours you work, and the frequency with which you get paid should all be outlined in your employment contract, while the payroll schedule and information about bonuses and tax deductions should be explained in your company’s employee handbook.
Many employers operate a salary range for different jobs and levels of seniority. The salary value will usually reflect industry averages and the level of experience. Salaries can vary hugely, depending on the type of job, the sector, the level of demand for skilled employees, the level of experience and expertise, and the position within the company.
To calculate your yearly salary and turn it into monthly or weekly payments, your employer will take the total sum you earn in a year and divide it by the number of weeks or months to produce a total for each week, fortnight or month, depending on how often you get paid. This figure will represent your earnings before deductions.
What Is Hourly Pay?
Hourly pay, also known as hourly wage or rate, is the amount of money you earn per hour of work. Hourly pay is an alternative to a salary. Rather than earning a set amount per year for working a fixed number of hours, people who are classed as hourly employees earn money per hour. If you work more hours, you’ll earn more. Let’s take a look at an hourly rate example: If you have an hourly rate of $40, and your employer wants you to work for 40 hours one week, they will pay you $1,600.
Your earnings will be calculated by taking the hourly rate or wage and multiplying it by the number of hours you work. Your employer should pay you for every hour you work.
Differences Between a Salary and Hourly Pay
The way employees are paid can affect how much they earn for the work they do. Here are some key factors to consider when weighing in on hourly wage vs. salary:
Exempt vs. nonexempt jobs
One of the most important differences to understand between a salaried employee and a worker with an hourly rate has to do with the category of exempt versus nonexempt jobs. The Fair Labor Standards Act governs the majority of jobs in the US. Under this law, exempt jobs don’t receive overtime pay. If your job is classified as nonexempt, you’re entitled to overtime pay if you work more than 40 hours per week in a single week. Overtime pay is 50% higher than your standard pay rate.
Most salaried employees are exempt, which means they don’t earn extra money for overtime. However, if a salaried employee is classed as nonexempt, their employer must pay overtime wages in line with the FLSA. This is designed to protect worker rights.
Hourly workers are nonexempt, which means employers must pay them overtime in line with federal guidelines for salary vs. hourly pay. If an hourly worker works over 40 hours in a given week, they must be compensated at a rate of 150% for any extra hours. This means that if an employee has an hourly rate of $20 and they work 50 hours in a single week, they’ll be paid $20 per hour for 40 hours and then $30 per hour for the extra 10 hours.
Before the beginning of the onboarding process, employees who have a salary will sign an employment contract, which outlines how many hours they’re required to work per week. They’ll have fixed hours every month and receive a fixed payment every week, fortnight, or month.
It’s more common for hourly workers to have a more flexible schedule since they may not be guaranteed set hours or a minimum number of hours per week. Some hourly workers have weeks or months that are much busier or quieter than others.
There are rules for hourly workers as well as salaried employee rules. Hourly workers must be paid the minimum wage, which varies from state to state. Salaried employees earn a wage based on a minimum annual compensation figure. The total for the year is divided by the number of payments to produce the weekly or monthly wage value. If an employee has a salary of $120,000, which is paid monthly, they’ll be paid $10,000 per month before deductions, such as taxes. From January 2020, all salaried employees who earn less than $684 per week ($35,568 per year) must be classed as nonexempt.
Hourly workers generally have more flexibility than salaried employees, who are required to work a set number of hours per week, every week.
Given that both salary nonexempt and hourly workers are compensated for working overtime, the main difference between their statuses is, in fact, in the job security level. If you have a salary, your job is likely to be more secure. If you’re an hourly worker, employers can reduce your hours relatively easily.
Pros and Cons of a Salary
Are you considering making a switch from hourly pay to a salary? If so, you should know that, in addition to the benefits of a salary, this type of pay also has some disadvantages.
Pros of a Salary
- Regular payments: With a salary, you know how much you’re going to earn every month.
- Employee benefits: Most salaried employees have access to a benefits package, which may include health insurance and sick days, for example.
- Job security: Salaried employees enjoy better job security. They are guaranteed a set number of hours and receive fixed payments for their work.
- Career opportunities: If you have a salary, you may find that you have better opportunities to progress within the company than an employee with an hourly rate.
Cons of a Salary
- Overtime: Most salaried employees are exempt, which means they don’t receive overtime wages, even if they work more than their allotted hours. Hourly workers and nonexempt salaried employees are paid for overtime at a rate of 150% for every additional hour over the standard 40 hours per week.
- Less flexibility: Salaried employees have to stick to a schedule and are required to work a set number of hours per week. Hourly workers are likely to enjoy greater flexibility.
- Holidays and leave: Some salaried employees may be limited in terms of when they can take paid holiday or time off compared to hourly workers. There is less autonomy when you’re a salaried employee.
- Work-life balance: Maintaining a healthy work-life balance can be difficult if you work long hours. If you have a salary and work set hours, you may also find it harder to switch off and separate your work and personal lives.
Pros and Cons of Hourly Pay
Just as there are advantages and drawbacks of having a salary, hourly pay has its pros and cons.
Pros of Hourly Pay
- Flexibility: Hourly work often offers greater control over your schedule and more flexibility than a salaried role.
- Overtime wages: Hourly workers are classed as nonexempt, which means entitled to overtime wages. Hourly workers will receive time and a half for every hour they work over 40 hours in a single week.
- Work-life balance: Hourly workers may find it easier to separate their work and personal lives and find a healthy work-life balance.
- Control: People who have an hourly rate usually have more control over their schedules and when they take time off than salaried employees.
- Time for other interests: Some hourly workers may not work as much as salaried employees. This means that they have time for other interests and activities.
Cons of Hourly Pay
- Fluctuations in earnings: Salaried employees know how much they’ll get paid every week or month. With an hourly rate, there’s less certainty as income can fluctuate. Some people may have months or prolonged periods when they work more or less than usual, and their income may rise and fall.
- Lack of stability: Job security can be an issue for employees on hourly pay, as employers can reduce their hours more easily.
- Benefits: Salaried employees usually have access to better benefits than hourly workers. If you’re on an hourly rate, you may have to fund your own healthcare insurance and forgo pay if you want to take holiday days, for example.
Hourly Wage vs. Salary: Which Is Better?
When looking for a job and analyzing various options, it’s important to think about what would suit you best. Here are some factors to consider:
- Your hourly rate: If you have a very high hourly rate and your skills are in demand, you could earn a lot more by being an hourly worker than a salaried employee.
- Overtime: If you have worked long hours without compensation before, you may be reluctant to do it again. If this is the case, you may wish to opt for hourly work or look for salary nonexempt positions.
- Benefits: For many employees, benefits are an important draw when choosing a job or a company to work for. It’s worth noting that salaried employees usually have access to better benefits packages.
- Flexibility: Some people want to find more flexible roles that give them greater control over their schedules, while others prefer the certainty of set hours and fixed earnings.
- Job security: Job security is essential for many employees who have bills to pay, a mortgage, and a family to support. Salaried work is often more secure and consistent than hourly work.
- Financial need: Many people who are looking for a job will need to ensure they earn a certain minimum amount of money per year. However, this may not always be the case. If you’re in a comfortable financial position, or you are only looking for part-time work, hourly work may suit you better.
If you earn a salary, you can calculate your hourly rate by dividing your annual income by the number of weeks in a year and the hours per week you work. If you earned $50,000 per year, for example, you’d divide that sum by 52 to get $962 and then divide this figure by the number of hours, for example, 40 hours per week, to get an hourly rate of $24.05.
Not necessarily. When discussing salary vs. hourly pay, it’s important to consider your particular situation. Salaries provide a stable, fixed income and access to benefits, while hourly pay provides more flexibility and the opportunity to earn wages for overtime.
For some companies, paying hourly workers may be better than offering salaries. Businesses may opt for an hourly rate if they don’t need workers consistently, the workload fluctuates, or they don’t want to hire employees on a long-term basis.
The Fair Labor Standards Act is designed to protect workers’ rights and make sure that salaries are fair. Salaried employees must earn a minimum in financial compensation per year. There are also rules governing low-income jobs. If employees earn less than $35,568 per year or $684 per week, they must be classed as nonexempt.
Danica’s greatest passion is writing. From small businesses, tech, and digital marketing, to academic folklore analysis, movie reviews, and anthropology — she’s done it all. A literature major with a passion for business, software, and fun new gadgets, she has turned her writing craft into a profitable blogging business. When she’s not writing for SmallBizGenius, Danica enjoys hiking, trying to perfect her burger-making skills, and dreaming about vacations in Greece.
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