Salary vs. Hourly Wages: Definitions and How to Calculate

Hourly pay is pay that a person earns based on a set hourly rate. This rate is then multiplied by how many hours the person works in a pay period, usually one or two weeks at a time. For example, if you make $10 an hour and work 30 hours a week, you’d make $300 per week at your job.

Employees who are paid hourly do not sign a contract with an organization and are only compensated for the hours they work each day. Employees must document their hours worked each day and submit this documentation to their employer at the end of the day or week.

Individuals who work as hourly employees can be either part time or full time, and there is no set number of hours an employer has to provide hourly workers each week.

All employees who are paid hourly are considered non-exempt by the Fair Labor Standards Act (FLSA) guidelines. This means that they are eligible for overtime and must be compensated with time-and-a-half pay when they work more than 40 hours in any given week. Not all employees who work based on salary vs. hourly are considered non-exempt.

Salary pay is when an employee is paid based on an agreed-upon salary each pay period that does not change regardless of how many hours they actually work. A salary is a minimum annual income and is broken down into pay periods; for example, an employee earning a salary of $40,000 annually will make around $1,540 bi-weekly before taxes and other deductions. Most salaries are based on a 2080-hour work year.

Many employers set the salary for each position, but some employers are willing to negotiate an employee’s salary based on work experience, education, and other factors. Employees typically receive an annual raise in their salary or receive a bonus at the end of each year.

Most salaried employees are considered exempt, but some are non-exempt. Here are the differences between these two types of employees:

• Exempt: Employees who are considered exempt are not eligible for overtime pay. These employees must meet several criteria as outlined bye the U.S. Department of Labor’s Wage and Hour Division. Criteria include the employee must make at least $684 per week, the must hold a specific position within the company (sales, professional, executive, computer, administrative), and they must be able to make decisions for themselves.
• Non-exempt: Employees who are non-exempt are eligible for overtime pay, which is 1.5 times the regular amount they make on an hourly basis. These employees are protected under the FLSA guidelines and are responsible for recording and submitting their overtime work records to their employer to be fulfilled.

Learn more: Are You Earning The Salary You’re Worth?

Overtime is paid to employees who work more than 40 hours in a week or more than the set number of hours agreed upon by the employee and employer in a pay period. Any overtime pay is paid at an increased rate than the employee’s regular pay. Most employers pay time-and-a-half in overtime, or 1.5 times what the employee makes on an hourly basis. For example, if an employee makes $20 an hour and they work an hour of overtime, they would be paid $30 for the hour of overtime worked. Employers can choose to pay employees more than time-and-a-half at their own discretion.

The following is an example of how to calculate overtime pay in a set pay period:

1. An employee who makes $10 an hour works 50 hours, which puts them at 10 hours of overtime for the workweek.
2. The employee makes $400 for the regular 40-hour workweek (40 x 10), and another $150 for the additional 10 hours of overtime (overtime pay is 1.5 x 10 = $15 an hour, 15 x 10 = $150).
3. The employee earns a total of $550 for that workweek.

The following are steps to calculate your pay if you are an hourly employee:

1. Determine how much you earn on an hourly basis.
2. Total up how many hours you worked in a set pay period.
3. Multiply your hourly pay by the hours you worked in that pay period.
4. Your total is how much you made in that pay period before taxes and deductions.

Example: Anne makes $9 an hour and works 50 hours in a two-week pay period. This means that Anne made $450 for that pay period (9 x 50 = 450).

The following are steps to calculate your pay if you’re a salaried employee:

Determine what your annual salary is.

1. Find out the pay periods for your organization. Common pay periods include weekly, bi-weekly, and monthly.
2. Subtract any holidays and vacation days that are not paid from the days you are compensated for. Most companies base their salaries on 260 days and 52 weeks per year.
3. Divide your annual salary by the workdays in your company’s work year. This is your daily pay.
4. Divide your daily pay by eight. This is your hourly pay.
5. Multiply your hourly pay by the hours worked in a pay period. This is how much you’ll make each paycheck.

Example: Sheila makes a $60,000 salary and is paid on a bi-weekly basis. Her company bases its salary pay on a 260-day year. This means that Sheila will make $2,308 per pay period (60,000/260 = $230.77 per day, 230.77/8 = $28.85 per hour, 28.85 x 80 = $2,308 bi-weekly).