Salary vs. Hourly Pay: Difference and Pros & Cons of Each

ByDanica Jovic
July 12,2022

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. 

  • Set 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. 

  • Payment rules

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. 

  • Flexibility

Hourly workers generally have more flexibility than salaried employees, who are required to work a set number of hours per week, every week. 

  • Job security

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. 
Frequently Asked Questions
How do you calculate the hourly rate from salary?

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. 

Is a salary better than hourly pay?

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. 

Why do companies pay hourly instead of a salary?

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. 

How do you make sure a salary is fair to workers?

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.

About the author

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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Refurbished Electronics A similar idea to the one above is opening a refurbished electronics business. Here, you take old devices, factory reset them, clean them up, repair any obvious damage, and then sell them on while making a profit. Landscaping The landscaping business can be a very lucrative option. If you are careful with the type of projects you take on, this can be a great way to make money. Start with small items that you can complete with simple hand tools, and then use the cash you earn to buy more equipment that will let you take on larger projects.  Vending Machines Believe it or not, there is actually quite substantial money to be made from getting into the vending machine business. It’s not an entirely passive income stream after the initial investment, though - at least not if you want to keep making money. The ongoing work involves restocking machines and fixing them if they go wrong. To make truly good money, you’ll eventually want numerous vending machines and a team of staff to help with restocking and repair work. Airbnb Business It’s easy to start an Airbnb business without money, but you will need a place for people to stay. Your home is more likely to be in high demand if you are close to a tourist hotspot or a business district. Selling Subscription Boxes Selling subscription boxes is a great way to start a business without experience. The way it works is simple: instead of building your own products and packaging them, you curate those of other brands and then pass them on to consumers in boxes. The value is in the selection process itself: you’re telling consumers what’s good instead of relying on them to figure it out for themselves.  Selling Phone Accessories Today, there’s a huge market for smartphone accessories, due to the sheer volume of people who now own these devices. They need Bluetooth headphones, tripods, cases, dashboard holders, portable and wireless chargers, and so on. What’s more, they are often willing to buy on impulse, either online or in-store, so you’ll likely have a high demand for your products. Just bear in mind that this is another job that will require some reasonable starting capital.  Online Consulting If you have had a long career and are starting a business from nothing, you might have success with online consulting. Here, you provide firms with guidance and advice on topics they might not understand. They may then ask you to directly intervene and perform tasks for them, paying you fees for the privilege. It’s another great job to put your skills to good use without having to spend any money upfront. Conclusion Starting a business without money is surprisingly easy in the modern world. Thanks to the internet and other communication technologies, it’s now something that’s accessible to most people. That said, some of the ideas we presented here still might require some sort of seed capital, but you won't need a large amount of funding to get your idea off the ground. 
By Julija A. · March 23,2022
Selling your business requires going through a sequence of well-defined steps. You need to proceed methodically so that you don’t miss out on key processes or make mistakes.  In the following selling a business checklist, you’ll learn more about determining the value of your business, preparing a statement that outlines why you want to sell it, and the various documentation you need to support its value. When selling a business, a checklist can be a lifesaver, so let’s look at what one should entail. Preliminary Business Sale Preparations When selling a business, it’s critical to get the price right. If you pitch too high, you won’t get any interest, and your company will remain on the market for too long. Before you sell your LLC, you’ll want to make sure that it’s ready for viewing. This could include fixing up any interior or exterior issues with the property.  You’ll also want to make sure that:  You have all the business documents you need for the sale. You understand the actual value of your business to prospective buyers. You know when you want to sell (timing the market can influence how much you get paid.) You’ve had a professional business valuation. Sale Of Business Assets Checklist Here is a business sale closing checklist:  1. Hire Advisors To Help Start the Business Sale Process You’ll need to organize the following professionals and tell them about your intention to sell your business:  Accountant – for filing all your business’s financial information in a professional manner. Business broker – an individual who acts a bit like a real-estate agent, finding the best price for your business and then taking a commission (usually around 10 percent on a $1 million enterprise). Valuation expert – a professional who understands what your business is really worth. Attorney – for making sure that you follow legal procedures for commercial sales. 2. Write Down Your Reasons for Selling You’ll want to provide potential buyers with compelling reasons for the sale. These could include:  The need to move to a different part of the country. Retirement. Illness. Moving onto a different project. 3. Organize All Your Contracts and License Agreements You’ll want to collate the following when selling your company:  Operating license agreements (for software, for example.) Company bylaws that relate to the sale. Dissolution of corporation status. Multiple owner sign-off. 4. Ensure You Have All Relevant Documents You’ll need both business and tax documents when selling. Business documents include things like your marketing plan, supplier and customer contracts, product pricing lists, and a written business plan. Tax documents include all your federal and state returns for the last three years, along with profit and loss statements. These are the most important documents needed to sell a business.  You may also require:  Intellectual property documents Financial statements with creditors and accounts receivable Legal documents, such as stocks and shares held by the company, employment contracts, pending lawsuits, and so on Business assets and associated paperwork Insurance coverage and policies.  5. Write a Company Inventory A company inventory lets both you and the buyer know in detail what comes with the business. Examples of items on this list might include buildings, equipment, vehicles, and staff roles.  6. Discuss Supplier Contracts Buyers will want to know who your suppliers are. Small businesses for sale, therefore, should have a list ready. For instance, make a list of all the services you regularly use that are not a part of your business, such as cleaners or SEO agencies.  7. Prepare for an Environmental Audit Any due diligence checklist for selling a business should include provision for an environmental audit of your firm. Only licensed environmental auditors can perform these. They will explore: Your business permits and whether they are up to date. Whether your company meets environmental standards. What measures you will need to take to bring your firm up to scratch if it is not already. 8. Provide Buyers With a List of All the Licenses and Permits Required To Run the Firm For someone buying a business, the checklist of needed permits and licenses could include:  Land use permits. Tax registration. Business sector licenses. Environmental permits. Liquor licenses. Business handover permits. These licenses may not automatically pass over to them when they purchase the business, so you need to be prepared for extra legwork.  9. Tell Your Employees Once you’ve put the groundwork in place, you’ll need to tell your employees what’s happening. Inform them whether they will keep their jobs, what corporate policies might change, and who the new owners are.  Always treat employees well and engage with them in concert with the buyer. They are a valuable asset to the firm, and you don’t want extra trouble in the form of lawsuits from disgruntled workers. 10. Identify Outstanding or Unfinished Work Tell the buyer which projects or contracts are ongoing and yet to be fulfilled. Check domain renewal dates for your business website.  11. Prepare Succession and Confidentiality Agreements Use your attorney to draft a succession agreement that will formally transfer your business to the new owner.  Also, get them to prepare a confidentiality agreement. This protects you from buyers who might misuse financial information regarding your company. It also prevents any sensitive information from becoming public.  12. Prepare and Sign the Sale Documents The final part of the process is to prepare and sign the sale documents. You’ll need:  An indication of interest, which is a document signed by both parties before buyers learn more about business assets or get copies of other documents, such as tax returns. A letter of intent, which is a sign of a pending purchase. A purchase agreement, to be signed by both you and the new owner once you finish the negotiations. Once you’ve signed all these documents and followed the proper legal process, the business sale is complete.  Further Reading Our Top Picks for Inventory Management Software Small Business Banking: Top Banks Conclusion In this article we ran through all the things you need to do to sell a business successfully. Usually, the buyer will pay the closing costs, so you don’t need to worry about these. Just remember to go through each of the factors we’ve mentioned carefully as forgetting any of them could compromise the sale of your business.
By Julija A. · March 22,2022

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