The difference between salary and wage is an important distinction, especially when it comes to completing your taxes and determining what employees are entitled to. The rules around how and when salary and hourly workers are paid differ. There are a number of pros and cons depending on if you’re the employee or employer. For example, the ability to reduce hours as needed for wage workers may be a pro to an employer, but that uncertainty is a con for employees.
This post will outline the basic differences between salary and wage workers and provide a detailed pros and cons list—one for employers and one for employees.
Wage workers, or hourly workers, are only paid for the exact hours that they work. If an employee calls in sick or is sent home due to a lack of business, they won’t be paid for the hours they miss.
On the other hand, if there’s an abundance of business and the employee needs to stay longer, they’ll be paid for each additional hour they work. The employee may qualify for overtime pay or double overtime pay depending on the number of hours worked and the overtime laws in that state.
A salaried worker is paid a fixed amount of money by their employer every year, regardless of how many hours they actually work. If the salaried employee is paid $40,000 a year, they’ll make approximately $3000 every four weeks. Salaried workers are also more likely to receive benefits like health insurance and retirement plans.
Budgeting is easier for a salaried worker, as they have a guaranteed paycheck (unless they are terminated or there’s a once-in-a-lifetime pandemic.) The downside is there often isn’t a clear start and end to work. Salaried workers may need to stay late or work on weekends in order to complete a project. They aren’t paid extra for working a little longer, and that can sometimes lead to poor work-life balance.
In general, salaried workers cost more than hourly workers. The salary usually works out to a higher rate than being paid by the hour, and there are a lot of added perks expected by salaried employees.
Salary contracts often come with bonuses, healthcare benefits, insurance options, and retirement plans. These added benefits come at a cost for employers, but they also ensure employees are healthy, happy, and well taken care of. The extra effort and money you put into your team can attract more skilled and experienced talent.
Hourly or wage employees are only paid for the actual hours they work, which means employers don’t have to pay for sick leave, personal days, or if the business closes early. Though, this fluctuation in hours will make payroll more complicated.
The Benefits of Salaried Workers
The Cons of Salaried Workers
● The recurring costs remain relatively the same from week to week, which makes it easier to budget and plan.
● Consistent pay makes for simpler payroll each pay cycle.
● Salaried workers feel more secure and are more likely to stay at one place of employment.
● Salaried workers are generally more loyal to the business they work for.
● You don’t need to pay overtime if work is completed after hours or on weekends.
● Workers aren’t likely to look for a second job outside of their current salary.
● A good salary attracts skilled and experienced talent.
● Generally, it’s more expensive to pay salaried workers.
● Medical pay, insurance, and retirement plans are often expected, which increases the cost of each employee.
● Employers are often expected to pay for supplies and technology.
● You need to commit to paying the salary you agreed upon even if business isn’t good.
● Workers may overextend themselves without you realizing it, which can lead to employee burnout.
The Benefits of Hourly Workers
The Cons of Hourly Workers
● You only need to pay for the hours an employee actually works.
● You are not expected to provide medical pay, insurance, or retirement plans.
● If the business closes early, you only pay for the hours that were worked.
● There’s more flexibility to reduce hours in an emergency or if your business needs to cut back.
● You don’t have to pay for sick days and other requested time off.
● It’s more complicated to process payroll for hourly workers.
● You need to pay overtime or double overtime depending on the circumstances.
● Workers may not be as loyal to the business without a salary.
● Workers may take multiple jobs if they are not receiving enough hours.
● Highly skilled and experienced talent may pass up hourly work for a salary offer.
● If you choose not to pay for sick days, this can lead to employees coming in sick or overextending themselves.
Hourly workers have more flexibility and are guaranteed to be paid for every hour they work. If you need to stay late or get called in for an extra shift, you will be paid for that time. You may also receive overtime pay depending on the circumstances and state the business is located.
The downside of hourly work is that it’s not as guaranteed. Salaried workers are paid a set rate that’s consistent each pay cycle, making it easier to budget and plan for your future. Salaried workers also tend to receive bonuses and extra job perks, such as medical and retirement plans, which are a huge—and sometimes life-changing—asset.
The Benefits of Being Salaried
The Cons of Being Salaried
●You have the security of a steady paycheck.
●You tend to make more than hourly workers.
●You can plan finances in advance since you know what you will be paid each week.
●You are more likely to receive bonuses.
●You may be given access to medical pay, insurance, and retirement plans.
●Office supplies are usually provided, and sometimes your technology is paid for as well.
●You have more flexibility over when and how work is completed.
●You are still paid if you need to call in sick or take a personal day.
●You are paid for the full day even if the business needs to close early.
●You might be expected to complete work outside of working hours.
●You can’t collect overtime pay if you work late in the evening or on weekends.
●The office culture and workplace competition may force salaried workers to overextend themselves.
●Office culture may encourage you to pass on vacation time to prove you are hard working.
●You are usually under a contract that ties you to one business alone, and you might not be able to take on other work outside of your single contract.
The Benefits of an Hourly Wage
The Cons of an Hourly Wage
●Every hour you work is paid for.
●There are opportunities to work and be paid for extra hours.
●Depending on the circumstances, there are opportunities to receive overtime or double overtime.
●You are not expected to work outside of scheduled hours.
●Your vacation pay is paid out, even if you don’t take vacation days.
●There’s less pay negotiation involved as the employer often already has a set hourly rate.
●You have better work-life balance since work never bleeds into your time off.
●You may not reach a full-time, 40 hour workweek.
●Your hours might be reduced if the business cuts back.
●It’s uncommon to receive large bonuses.
●It’s uncommon to receive medical pay, insurance, or retirement plans.
●You won’t be paid for the hours you couldn’t work if the business closes because of weather, technical issues, or too few customers.
●Holiday pay for hourly employees may not be provided.
●If you need to call in sick or take a personal day, you won’t be paid.
●Your tools or supplies may not be provided by the employer.
The main difference between exempt and nonexempt employees is whether or not they can receive overtime. An exempt employee is not allowed to receive overtime, whereas a nonexempt employee is. Under federal law, an employee’s eligibility for overtime is determined by the Fair Labor Standards Act (FLSA), though the criteria may differ from state to state.
Exempt employees are not protected by the FLSA, so federal law does not require their employer to pay them overtime.
The distinction between an employee and a contractor is important for tax purposes. Employees have a more direct relationship with your business, and you are required to withhold taxes for them by law. Contractors, on the other hand, are responsible for calculating and withholding their own taxes. Businesses need to file W2s for employees and file 1099s for contractors.
It’s up to the employer to know the difference, and there can be heavy fines for misclassifying a hire. Learn more about the difference between employees and independent contractors directly from the IRS website.
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