Deciding whether to pay your team a salary or an hourly wage affects everything from your payroll process to how your employees experience their work-life balance. Knowing the key differences, along with the pros and cons of each, helps you choose the compensation structure that makes the most sense for your business.
More from our experts
What you’ll learn
What you’ll learn
Key takeaways
- Salaried employees earn fixed, predictable pay, often with added benefits, but may face blurred work-life boundaries.
- Hourly employees are paid for every hour worked, including overtime, which can support a clearer work-life balance.
- Employers must follow FLSA rules, based on job duties and salary level, to determine which roles are exempt from overtime.
- Choosing between salary and hourly pay depends on job type, industry, and what works best for both the business and its employees.
In this guide, we’ll take a bird’s-eye view of how salary vs. hourly employee pay works, cover some of the industries that favor each approach, and discuss how each payment method can impact the team members you hire.
Salary overview
A salary is a fixed annual amount an employer distributes on a set schedule. For example, an employee with an annual salary of $75,000 receives regular gross payments of $6,250 each month. Employers must calculate payroll taxes and other deductions from this monthly total, leaving the employee with reduced take-home amount.
Paying someone a salary doesn’t automatically exempt them from overtime under the Fair Labor Standards Act (FLSA). To qualify as exempt, an employee must also meet a minimum salary threshold and pass a duties test based on their actual job responsibilities. Employees who don’t meet these tests are non-exempt and entitled to overtime pay, even if they’re paid a salary.
Before salaried employees begin working, their offer letter will generally specify how much they’ll earn per year, the number of hours they must work per week, and the job responsibilities they must fulfill to continue receiving their salary. Employers often also provide benefits to salaried employees on top of their pay, such as health insurance, retirement plans, and paid time off.
A common question employers ask is how to handle time away from work for salaried employees. To learn more, we asked Peggy James, a certified public accountant with over ten years of experience helping business owners.
Do salaried employees get paid if they do not work?
“It depends on the employer and the employment agreement, but most employers offer salaried employees some type of paid time off,” she explains. “Some employees will receive vacation and sick time as well as holidays, too.”
— Peggy James, Certified Public Accountant (CPA)
Peggy also points out that other employees may have a bank of paid time off (PTO) they can use for either vacation or sick time. It is common for employees to accrue vacation time or paid time off at a rate based on how long they’ve worked for the employer.
Though situations vary, if an employee does not work on a particular day, they will typically use their vacation hours or PTO to receive pay for the day.
Why can paying by salary be a good fit for employers?
Whether a salary or hourly rate is the better fit often comes down to the type of work the employee does, the industry, and how much schedule flexibility the role requires. We spoke with Peggy James again to get her thoughts on why paying by salary can be the way to go (and when paying by the hour can be the better option, a bit further into the article).
“In many cases, paying a salary instead of an hourly rate can benefit the employer more than the employee. Because a salaried exempt employee isn’t specifically paid for time worked, it is not unusual for exempt employees to work more than a standard 40-hour work week. If they do, they will not be paid more for the additional time they work. An hourly employee, on the other hand, may benefit from being paid for all of the time they work. If they work more hours, they will receive more pay.”
— Peggy James, Certified Public Accountant (CPA)
One thing to keep in mind is that the FLSA has strict definitions for which employees qualify as exempt from overtime rules. An employer can’t just decide to make a position exempt to avoid paying overtime. The job itself must meet the FLSA’s criteria to be classified as exempt.
Peggy also says employers should give employees time to adjust when switching from hourly to salaried pay, or vice versa.
“Aside from the type of work being performed, the main difference is that salaried employees are not specifically paid for the amount of time they work. Instead, they are being paid to do a job and complete their responsibilities regardless of how much time it takes to do so,” Peggy says.
What are the benefits of being salaried?
Salaried employees enjoy various advantages. Some of the most significant benefits of receiving a salary include:
- Stability and predictable income: Fixed payments give employees a general idea of what they’ll earn each pay period. This provides stability when budgeting and planning for the long term.
- Access to benefits and perks: Salaried jobs often come with benefits and perks such as health coverage and paid sick leave.
- Incentives and opportunities for career advancement: These roles often come with the possibility of earning a raise, bonus, or promotion based on good performance.
Disadvantages of salaried employment
Though having a salary is often seen as preferable to an hourly wage, it has a few disadvantages. Some of the drawbacks of a salaried position include:
- Increased responsibilities and expectations: Because employees with a salary have more set income, their employer may require more of them in terms of productivity and performance quality.
- Potential for poor work-life balance: Salaried employees may need to make calls or attend business trips outside their regular work schedule. This can blur the lines between professional and personal time.
- No overtime pay: If a salaried employee is exempt under the FLSA, they’re paid the same amount regardless of how many hours beyond 40 they work in a week.
- Fixed pay despite challenges: Salaried employees will receive the same monthly payments after payroll deductions regardless of how complex or easy their tasks are.
Hourly pay overview
Employees who don’t meet the FLSA’s exemptions are classified as non-exempt and must receive overtime pay for any hours worked beyond 40 in a week, regardless of whether they’re paid hourly or on a salary. In practice, most non-exempt employees receive hourly pay, since it’s the simplest way to calculate overtime correctly. Employers and employees agree on an hourly rate before the work begins, and the employer pays the employee for every hour worked, including partial hours.
To calculate an employee’s hourly wages, multiply the hours they worked by their hourly rate. If an employee makes $25 per hour and works 40 hours a week, their pay before taxes is $1,000 for that week.
Hourly employees who work more than 40 hours a week are usually entitled to overtime pay, which is at least time-and-a-half their regular rate.
For example, if an employee works 45 hours a week at a base rate of $25 per hour, they earn $1,000 for the first 40 hours. The additional five hours are paid at 25 multiplied by 1.5, or $37.50 per hour. Multiply 37.5 by five to get $187.50 in overtime pay. Add the $1,000 and $187.50 together for a total of $1,187.50 for 45 hours of work.
Why can paying hourly be a good fit for employers?
Once again, we spoke with Peggy to get her professional insight into why, depending on the business, hourly pay may be the best option.
Paying an employee hourly (as long as they qualify under the FLSA) can be beneficial for employers. It gives the employer more control in terms of setting work schedules and planning coverage for the business. It also allows for flexibility when scheduling employees to work.
— Peggy James, CPA for small businesses
For example, if the employer knows that certain days of the week or times of year are busier than others, they can schedule employees to work more hours during those times. On the flip side, if they don’t need as many employees during certain shifts, they can adjust staffing accordingly.
What are the benefits of being hourly?
Hourly employment comes with some benefits salaried employees don’t receive. These advantages include:
- Flexibility in work hours: Employers often set hourly workers’ schedules one or two weeks earlier. This makes requesting certain work times or time off easier with less notice.
- Pay directly tied to hours worked: Working hourly means employers pay their workers for exactly how much work goes into doing their job.
- Opportunity for overtime pay: Workers eligible for overtime who put in more than 40 hours a week receive extra compensation for those additional hours.
- Healthy work-life balance: When an hourly worker clocks out, they don’t have to worry about unexpected tasks to complete. This draws a clear boundary between personal and work time.
Disadvantages of hourly employment
Hourly employees have some disadvantages as well. Some of the drawbacks to hourly employment include:
- Limited benefits: Hourly workers often don’t receive the same benefits as salaried employees, such as health insurance or paid time off.
- Unpredictable income: Because schedules can change from week to week, hourly employees may earn less if an employer offers fewer hours, which can make it harder to plan finances over the long term.
How do employers determine who should receive salary vs. hourly pay?
This is largely determined by FLSA, which looks at the employee’s job duties and whether their pay meets the minimum salary threshold for exemption.
The first step in figuring out which employees to pay a salary and which to pay hourly is to understand the type of work required for the job and how that fits within the FLSA’s exemption criteria. Employers can read the law themselves and make their own determinations, but many are better off enlisting the help of a payroll company or attorney to ensure compliance. The federal government can penalize companies for repeated and willful violations of the FLSA, so it’s important to get this right.
The table below can help you get a better sense of how each pay structure comes into play.
Salary vs. hourly pay comparison
| Consideration | Salary | Hourly |
| Payments | Annual salary divided into regular fixed payments | Hourly rate multiplied by hours worked |
| Work hours | Typically 40 hours per week, but some jobs offer flexibility | Assigned schedule each week |
| Overtime | Usually unpaid for exempt employees, since extra work is factored into the salary | Usually paid after working 40+ hours in a week |
| Benefits | Often eligible for employer-sponsored benefits | May be eligible for fewer benefits than salaried employees |
| Income stability | Steady pay and work | Number of work hours may change weekly |
| Work-life balance | Work and personal time may blur together | Clear distinction between work and personal time |
Considering job type and industry
Receiving a salary or hourly rate can depend on the agreement between an employee and employer as well as the type of work being performed. However, some common positions and industries are more likely to align with one of the payment methods over another. For example, office workers, medical professionals, and engineers often receive salaries because their positions are classified as exempt from the FLSA, while those who work retail, food service, and transportation jobs often receive hourly wages for these non-exempt positions.
Some common salaried positions include:
- Chief executive officer
- High school teacher
- Doctor
- Software developer
- Accountant
- Journalist
- Manager
Common hourly positions include:
- Cashier
- Server
- Waiter
- Carpenter
- Factory worker
- Bartender
- Retail worker
Understanding salary vs. hourly pay makes good business sense
Deciding whether your small business should have salaried or hourly workers depends on several factors, from the type of services your company provides to how often your employees interact with customers directly. Whatever option you choose, reliable payroll software makes paying your team easier by automating calculations instead of relying on spreadsheets, where errors are more likely to slip through. Many online payroll providers can help you save time, avoid payment mistakes, and stay ahead of IRS penalties, all while handling federal, state, and local tax filings.
Whatever pay structure you choose, we’re here to help you get payroll right, from classification to compliance. Best of luck as you decide the pay structure that best fits your organization and we welcome your questions!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.