Navigating the world of employment can often feel like a maze, especially when it comes to understanding compensation. But, one of the first concepts you should grasp is the distinction between salary and hourly wages. We at the MarketWatch Guides team explain these pay structures below.
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What Is the Difference Between Salary and Hourly Pay?
Below, we define salary and hourly. Then, we look at the key differences between the two.
Salary Pay
A full-time employee gets an annual salary. This salary is divided into and paid out in equal amounts based on the employer’s pay schedule. Employers usually pay employees monthly or bi-weekly, depending on state requirements and company preference. With the former, the employee’s annual salary would be split into 12 payments. The latter is 26 payments.
For example, a marketing manager might have an annual salary of $60,000. If their employer pays them once a month, they would get a monthly paycheck for $5,000 (60,000 / 12).
In theory, full-time employees work 40 hours a week. This started in 1940 when Congress passed the Fair Labor Standards Act (FLSA). However, salaried employees might go over 40 hours if they have a big project to finish. They could also work fewer than 40 hours if they take time off for a sickness, a family emergency, an appointment or something else. Either way, their salary doesn’t change. In the example above with the marketing manager, they would still get a $5,000 paycheck even if they took a week off to recover from the flu.
Hourly Pay
Hourly employees have a fixed rate they make per hour and get paid based on the number of hours they work. This pay structure is common with part-time, contract and trade positions.
For instance, a retail worker might earn $15 per hour. If they work 30 hours during a given pay period, they get a paycheck for $450 (15 x 30).
If an hourly worker goes over 40 hours per week, they are eligible for overtime pay. For hour 41 and onward, they get 1.5 times their regular pay. Revisiting the retail worker example, let’s say they work 45 hours in a given week. Their regular hourly rate is still $15 an hour, but their overtime rate is $22.50 (15 x 1.5). Their next paycheck would have $600 (15 x 40) for regular pay and $112.50 (22.5 x 5) for overtime pay for a total of $712.50 for that week.
Key Differences
Here is a breakdown of the key differences between salary and hourly pay:
| Aspect | Salary Pay | Hourly Pay |
|---|---|---|
| Overtime Pay | Typically not eligible* | Eligible beyond 40 hours per week |
| Pay Amount | Paid same amount regardless of hours worked | Paid based on hours worked |
| Time Tracking | Not required | Required to record hours worked |
*Salaried workers are usually exempt from the FLSA, which is the law that mandates extra pay for overtime hours.
In sum, salary pay offers consistency; you know when and how much you are going to get paid even if you take some time off. While hourly pay isn’t consistent, you get time and a half if you work overtime.
Salary Pay Pros and Cons
Having a salaried position comes with its own set of advantages and disadvantages, impacting various aspects of professional and personal life.
Benefits of Salaried Positions
Some of the top reasons salaried positions are attractive include:
- Benefits package: In addition to their regular wages, salaried employees usually get access to health care, dental and vision insurance, child care subsidization, retirement planning and other perks. There is only one federal law mandating benefits, and that is the Affordable Care Act (ACA) mandating health insurance for employers with at least 50 employees who work at least 30 hours per week. However, employers of every size offer health insurance and other benefits anyway to attract and retain skilled, hard-to-come-by talent.
- Stability and predictability: Once you get a salaried position, you know how much you have to work and how much you get paid. Your schedule and pay stay the same until you leave or are let go. This consistency helps with budgeting and planning your personal life.
- Professional development: Employers often offer trainings to their salaried employees so that they can develop new skills to use in their current roles and beyond.
Drawbacks of Salaried Positions
Salaried positions aren’t perfect, though. Here are some drawbacks to consider:
- Expected overtime work: Salaried employees are often expected to complete tasks regardless of how long they take — even if that means going over 40 hours per week.
- Limited overtime compensation: When salaried employees go over 40 hours per week, they don’t usually get additional compensation. In other words, they get paid the same amount for a 60-hour work week as they do for a 40-hour work week.
- Less schedule flexibility: Salaried employees are expected to work certain hours on weekdays — think of the term “9-to-5 job.” This can make it challenging to manage personal commitments and emergencies that come up.
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Hourly Pay Pros and Cons
Hourly pay has the opposite pros and cons as salary pay. Let’s take a closer look at them.
Benefits of Hourly Wages
The main selling points of hourly positions are schedule flexibility and pay protection:
- Schedule control: An hourly employee can work as many or as few hours as they want, depending on the agreement they have with their employer. This flexibility is ideal for workers who have classes, kids or additional jobs.
- No uncompensated work: Federal law mandates that hourly employees get paid for every hour they work. In other words, they are legally protected from working 60 hours but getting 40 hours of pay.
- Overtime compensation: As soon as an hourly employee surpasses 40 hours in a week, they get paid 1.5 times their regular pay.
Drawbacks of Hourly Wages
Hourly positions come with certain challenges that can impact financial stability and job satisfaction, such as:
- Unpredictable earnings: Hourly workers don’t usually work the same hours every week, which means their pay isn’t consistent. This variability can complicate budgeting and financial planning.
- Lack of benefits: Most hourly workers don’t get paid leave, health insurance or other benefits because they work part-time, and federal law doesn’t mandate benefits for part-time employees.
- Work-life balance impact: Many hourly employees have to work irregular hours or juggle multiple part-time jobs, which can affect their ability to build lives outside of work.
- Limited career advancement: There are fewer opportunities for career advancement in hourly roles. Hourly positions see a lot of turnover, and employers don’t want to invest much money and effort into helping their employees learn new skills if they’re going to leave. However, this lack of access to training and learning can restrict long-term professional growth and earning potential.
Salary and Hourly Job Examples
The division between hourly and salaried jobs is often about the nature of the work.
Hourly Job Examples
Typical hourly jobs include:
- Retail cashiers
- Fast food workers
- Assembly line manufacturers
These types of roles often entail repetitive tasks. Their industries typically have high- and low-volume times of year. Therefore, hiring hourly employees offers the employers flexibility in terms of how many employees they schedule and when.
Salaried Job Examples
On the other hand, salaried roles may be:
- Office managers
- Executives
- Engineers
These jobs usually entail a higher level of responsibility and complexity. Workload varies as projects pop up, so a salaried structure gives the employers predictability in terms of how much they set aside for compensation.
How To Choose Whether To Hire Salaried or Hourly Employees
An employer faces a crucial decision when choosing between hiring salaried or hourly employees, as they carry different implications for the business. Here are some key considerations:
Skill, Experience and Education
Positions that require certain degrees or certain skills are generally salaried. That’s because they are classified as “professional,” which is a category that the FLSA doesn’t give hourly wage protections to. Therefore, if you’re hiring for a specialized role, pay the candidate a salary.
Similar Roles
Look at what similar roles at other companies in your industry make. For instance, if you’re hiring for an office manager, and you see that your competitors all pay their office managers salaries, then you should probably offer your candidate a salary as well. This helps you attract and retain talent. You don’t want to struggle to find employees or keep them around because other companies are offering better pay.
Financial Resources
Hourly workers are generally cheaper to employ. That’s because you don’t have to offer benefits. According to the U.S. Bureau of Labor Statistics (BOL), the average private sector employer in September 2023 paid $29.34 per hour for salary and $12.19 per hour for benefits for each of their salaried employees. Think of all the money a business could save if it didn’t have to worry about that extra $12.19 per hour per employee.
That being said, hourly employees are entitled to overtime pay if they work more than 40 hours per week. If you have a lot of employees that work over 40 hours per week, you might want to do a quick cost analysis to determine how much it costs you to pay for overtime and how much it would cost you to pay for benefits to see which option is cheaper.
HR Resources
The HR department at any company is responsible for handling tasks that create a healthy work environment for employees. If a company is made up of entirely hourly employees, HR only has to worry about pay and hiring. But when you add salaried employees to the mix, you have to worry about additional tasks, such as benefits administration and career advancement. The more salaried employees you hire, the more admin work you have and the more HR professionals you need to bring on. So, determine if you can afford the additional support staff needed.
The Bottom Line
There are key differences between salary and hourly pay. Salaried roles offer consistent wages and benefits, but they may require longer hours without overtime pay. Hourly positions, while offering flexible schedules and overtime earnings, lead to fluctuating income, which can impact financial stability. It’s essential to weigh these considerations to choose the pay structure that makes the most sense for your career ambitions and lifestyle needs.
Frequently Asked Questions About Salary vs. Hourly Pay
Being salaried is better for workers who want consistent income and access to benefits. However, it’s not without its drawbacks, with the main one being longer hours without overtime pay.
Being salaried offers predictable income, comprehensive benefits and advancement opportunities.
Professional and managerial roles are typically salaried, while retail, restaurant and other customer service industries often pay hourly.
No, salary and hourly are both taxed the same. The tax rate depends on where you live and how much you make, which are two factors that don’t change as an hourly or salaried employee.
The main disadvantages of being on a salary are longer hours without extra pay and less schedule flexibility.
Yes, salaried employees usually get paid for a certain amount of time off each year. This means that you can take time off for holidays, vacations, illnesses and other reasons and still expect the same paycheck.
Most salaried employees aren’t eligible for overtime pay. They are expected to work more than 40 hours per week if that is necessary to get all of their work done. The only exception to this rule is for salaried employees who make less than $684 per week. They can get overtime pay.
There is no set rate for hourly workers; it depends on where they live, what they do and other factors. However, the federal government does have a minimum wage — $2.13 per hour for hourly workers who receive tips and $7.25 per hour for other hourly workers. As an employer, you must pay your hourly employees at least this amount unless your state’s minimum wage is different. In that case, you must follow the state minimum wage.
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