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You have a lot of decisions to make when you hire an employee. One of the biggest decisions is whether to structure the role as a salaried or hourly employee. How you pay an employee―in addition to how much―could determine whom you can attract to the role and how the employee impacts your business’s finances long-term.
In this guide, we’ll explain the difference between hourly wage versus salary pay, the pros and cons of each and how to determine which is best for your business.
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What Is a Salary?
A salary is a set amount an employee is paid for work, usually based on a yearly time frame. Employers pay on a weekly, biweekly or semimonthly schedule and base paychecks on a fraction of the annual salary. Employees must be paid a minimum of $684 per week to qualify as salaried, which also excludes them from being eligible for overtime pay.
Salary is the base pay rate for an employee. It doesn’t include other types of compensation that might be included in an employee’s paycheck, such as commissions, bonuses, stipends, reimbursem*nts or benefits, such as retirement contributions and health insurance plans.
What Is an Hourly Wage?
An hourly wage is the amount an employee is paid per hour they work. A role that’s paid hourly doesn’t come with a set or target annual pay. Instead, an employer pays an employee based on how many hours they work each pay period, which might be a week, two weeks, half a month or a month. Hourly wage employees must be paid the federal or state minimum wage rate, whichever is higher.
Like salary, hourly wages are a base pay rate for an employee. They don’t include other types of compensation or benefits that might be available for the employee such as health insurance or retirement.
Both full-time and part-time employees may be paid hourly. Most hourly workers are classified as “nonexempt” under the Fair Labor Standards Act (FLSA), which also sets the federal minimum wage and other worker protections. The FLSA requires nonexempt to employees be paid at least 1.5 times their hourly pay for any time worked beyond 40 hours in a week (colloquially called “time-and-a-half”). It doesn’t mandate overtime pay for holidays or other off-shifts as long as those are included in the 40-hour work week, but many employers offer additional pay for these shifts.
Hiring Salaried vs. Hourly Employees
Should you pay employees an hourly wage or a salary? Each structure has pros and cons, so consider both before deciding on a plan for each role.
Pros and Cons of Paying Employees a Salary
| Pros | Cons |
|---|---|
✔ You’ll simplify payroll and accounting by reducing fluctuations in pay. | ✖ You can’t pay employees less during periods that require less work, even if they clock hours. |
Pros and Cons of Paying Employees an Hourly Wage
| Pros | Cons |
|---|---|
✔ You can adjust personnel costs based on expected revenue by reducing worker hours. | ✖ Costs fluctuate each pay period if the schedule varies. |
How to Determine Whether to Pay Hourly vs. Salary
You can hire a mix of employees with some paid hourly and some paid salary. Decide which compensation type makes the most sense for each role based on the responsibilities and experience required.
For each role, consider:
- Seniority and level of experience
- Amount of work time the role requires
- How the employee’s contribution is measured, such as being present versus business results
- How similar roles are compensated in the job market
- The financial resources you have allocated for the outcomes you want from the role
The greatest benefit of paying employees a salary is attracting more senior workers, who tend to expect a stable paycheck and benefits. Having mostly or exclusively salaried workers also stabilizes your payroll, so costs will remain the same regardless of how much or how little business you do.
The biggest benefit to hourly wages is cost savings for employers. Employee compensation fluctuates with the amount of work they do, so you can adjust your costs based on revenue. Hourly employees can also be employed part-time, which may mean they don’t expect benefits, such as health insurance and retirement plans. Norms exist in many industries to dictate whether a role is salaried or hourly.
For example, hourly wages are common in the service industry, where a worker’s on-site presence is a necessary contribution, the amount of work available fluctuates in line with the amount of revenue coming in and many workers are seeking less than full-time positions.
By contrast, in many roles classified as knowledge work, the employee’s contribution isn’t about time but about outcomes or deliverables. The outcomes are often scalable, so revenue doesn’t correlate with hours worked, and workers may be more likely to seek full-time roles with steady paychecks and benefits.
Bottom Line
Whether you compensate a role with an hourly wage vs. a salary depends on a lot of factors in your business and the job market. Consider the norms for the type of role you’re hiring and the industry you’re in. Think about which structure makes fiscal sense based on your business’s cash flow and revenue.
Frequently Asked Questions (FAQs)
When is salary better than hourly wages?
Salary is often better for employers and employees because of its consistency. You pay employees a set amount each pay period based on their annual salary, so money management is easier on both sides.
Is salary taxed differently than hourly?
No. Income is taxed at the same rate and in the same way regardless of how compensation is structured. An employer processes payroll taxes based on the amount of wages on a paycheck, whether they’re figured hourly or as part of a salary.
What are the disadvantages of being on a salary for employees?
Employees earning a low salary in an area with a low minimum wage could be at a disadvantage to hourly workers in a similar role because they aren’t entitled to overtime pay, and there’s no limit on how many hours they can work in a week.
Do salaried employees get paid if they do not work?
An employer can’t dock pay for a salaried employee for any week in which the employee worked or was available and willing to work, regardless of how many hours they put in. Salaried employees tend to also be entitled to paid time off, such as vacation and sick leave. They’ll get paid normally for that time off, even if they don’t work at all within a workweek.
