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employers use for hourly paychecks

How is payroll different for hourly and salaried employees?

At the end of the day, the act of running payroll is pretty similar for any type of employee. You just take their gross wages (or how much money they’ve earned in a given pay period) and withhold local, state and federal payroll taxes, plus any additional payroll deductions for things like health benefits, a retirement plan, or garnishments.

The path from gross wages to net wages (or take home pay) doesn’t really change much. The primary difference between payroll for hourly and salaried employees is how you calculate those gross wages in the first place.

Gross wages for hourly employees

For workers whose compensation is based on how much they work, you calculate their gross wages by multiplying the number of hours they worked during a pay period by their hourly pay rate.

It’s pretty straightforward, generally, but a number of states have overtime laws which can increase employees’ pay rate if they work more than a certain number or hours in a day or in a week (typically 8 hours/day or 40 hours/week). Make sure to account for these wrinkles when you calculate paychecks for hourly workers.

Gross wages for salaried employees

For employees who are paid an annual salary, gross pay is calculated by dividing their annual salary by the number of pay periods in a year. For example, if an employee earned an annual salary of $100,000, this is what their gross wages would be for different pay periods (assuming there are no other pre-tax deductions):

To understand more about choosing different pay schedules, here’s more information.

Who should be salaried and who should be paid hourly?

When they hire an employee, employers have some discretion to choose who is paid hourly and who is paid a salary. Typically, employees whose hours are fixed (or consistent), and employees at higher compensation levels are offered a salary. Employees at lower compensation levels whose hours are more variable tend to receive an hourly paycheck.

However you choose to handle compensation, there are a few rules that need to be followed — most notably the rules for exempt and non-exempt employees under the Fair Labor Standards Act (FLSA). In a nutshell, the FLSA says that employees should be entitled to overtime pay when they work more than 40 hours in a week, unless they are “exempt” and fit into one of these categories:

• They are an executive
• They offer skilled professional services
• They have administrative or management responsibilities
• They are highly compensated (earning more than $107,432 per year in 2021)
• They are a computer programmer or analyst
• They have an outside sales role

There are a number of other small exceptions. Take a closer look at the differences between exempt and non-exempt employees or reach out to an employment or tax pro if you have more questions.