How do you pay your employees? Do you know the differences between salary vs hourly? What about exempt vs nonexempt? And, which is better?! If all these questions have you befuddled, it's okay. You're not alone and we are here to clear up the matter once and for all. So take a deep breath and read on to learn more about these two pay types and how their pay stubs differ.
Salary vs Hourly
Hourly employees have certain rights given to them by the Fair Labor Standards Act (FLSA). Salaried employees are typically exempt from these rights. This is where the terms exempt and nonexempt come from. For exemption status, an employee must meet the following requirements:
- Ineligible for overtime
- Make a minimum amount per year regardless of hours worked
- Perform certain job duties as outlined by the FLSA.
Hourly employees must work a pre-determined number of hours each week, usually 40. In exchange, the employee gets paid a specific amount for each hour worked. This is their hourly rate. If an hourly employee exceeds 40 hours, they get paid at least 1.5 times their hourly rate per extra hour worked. This is their overtime rate.
By contrast, a salaried employee gets paid to do a job and must work until they complete the job. That means they might work 50 hours one week, but during the following week, they only work 35. Salaried employees are not eligible for overtime when they work more than 40 hours per week. The trade-off is they get paid the same amount even if they work less.
FLSA states that an hourly employee has a right to a minimum wage. That minimum wage is set by the state in which the employee works. For example, the minimum wage for South Carolina is $7.25 per hour while Nebraska's is $9.00. Employers can't pay hourly employees less than the minimum except in certain circumstances.
For instance, because waitresses receive tips, they are exempt from the minimum wage. Salaried employees don't have a minimum wage but still must make at least $455 per week. This translates to an annual salary of $23,660. Certain states, like California, have their own laws that require higher rates for salaried employees.
FLSA also requires that an employee perform certain high-level job duties before they are exempt from their rights. Eligible job duties include, but are not limited to:
- Regularly managing two or more employees
- Interviewing and hiring new employees
- Determining pay rates, hours and job duties of other employees
- Delegating work among employees
- Securing the workplace and ensuring safety in the workplace
For exemption status, these job duties must be a primary function of the role. But as long as the wage requirements are met, you can still have salaried employees who are not exempt from FLSA. In other words, salaried positions are not limited to management, but exempt employees are.
Calculating Gross Income
The pay stubs for hourly and salaried employees are almost identical. The only real difference is the way gross pay gets calculated. Even the way you calculate the taxes are the same. To be clear, gross income is the amount paid to an employee before any deductions or taxes get taken out. This is also called takehome pay. Once taxes and deductions get removed, what is left is the employee's net pay.
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Calculating the gross pay of an hourly employee is easy. You only have to multiply their hourly rate by the number of hours worked during the pay period.
An hourly employee works 40 hours for the pay period.
Their hourly rate is $15.00 per hour.
40 regular hours x $15.00 per hour = $600.00 gross pay
An hourly employee works 45 hours for the period.
Their hourly rate is $10.00 per hour.
They get paid time and a half for overtime hours. In this case that is 5 hours at a rate of $15.00 per hour.
40 regular hours x $10.00 per hour = $400 regular pay.
5 overtime hours x $15.00 per hour = $75 overtime pay.
$400 regular pay + $75 overtime pay = $475 gross pay.
To calculate a salaried employee's gross pay, you must determine how much of their annual salary they get each pay period. There are two steps:
- Determine how many pay periods the employee has per year.
- Divide their annual salary by the number of pay periods.
A salaried employee gets paid bi-weekly. There are 52 weeks in a year. So this employee has 26 pay periods each year.
Their annual salary is $50,000 per year.
During this pay period, they worked 80 hours which is typical for a two week pay period.
$50,000.00 annual salary / 26 pay periods = $1,923.08 gross pay.
A salaried employee gets paid weekly. There are 52 weeks in a year. So this employee has 52 pay periods each year.
Their annual salary is $30,000 per year.
During this pay period, they worked 52 hours which is more than a typical work week.
$30,000.00 annual salary / 52 pay periods = $576.92 gross pay.
As you can see, overtime hours are not factored in for salaried employees. No matter how many hours they work during a given pay period, their gross pay remains unaffected.
Tracking Hours for Salaried Employees
Even though salaried employees don't get paid for the hours they work, you should still track their hours. This is for several reasons:
- Helps evaluate workload so you can adjust where necessary
- Holds employees accountable and keeps them productive
- Client billing
- Avoid FLSA wage and hour lawsuits
If you track the hours of a salaried employee, include them on the pay stub. This way your employees can review the information as well and they don't feel like it's being hidden from them.
Which Is Better?
This is one question you have to answer for yourself. And it should be answered independently for each role in your company. One of the huge benefits of salaried employees is that it grants a measure of autonomy. Research shows that autonomy in the workplace increases job satisfaction and promotes innovation.
That said, it has also been proven to be counterproductive in certain situations. So again, the role should dictate the pay type.
Ready To Generate Your Own Pay Stubs?
In the debate of salary vs hourly, it all boils down to this: No matter how you choose to pay your employees, you must still create a pay stub for them and it must be accurate. That is where Pay Stub Creator comes in. Take a look at the seven benefits of using online pay stub software. We make it easy for you to generate pay stubs for your employees, just enter your information & download your pay stub!