Salary Vs. Hourly: Which Is Better For Workers?

If you're seeking your first job or looking for a new one, you might be unsure of whether to opt a salaried our hourly position. You may also be unaware of the differences between the two, which can make it difficult to choose the one that suits you best. In this article, we'll explain the primary differences between salary and hourly pay rates so you can make an informed decision about which rate is best for you.

Differences Between Salary And Hourly

There are two main ways to get paid in the workforce: salary and hourly pay. Knowing the differences between these two types of pay can help you decide whether to search for hourly or a salaried positions. Regardless of the path chosen, both options can help individuals maximize their earning potential.

Salaried employees are often given a set annual income, regardless of the number of hours worked. This means that their pay remains the same even if they work more than the standard 40 hours per week. This predictability can be advantageous for those who prefer a consistent cash flow and want to plan their finances accordingly.

Unlike salaried employees, hourly employees have the potential to earn more if they work more hours. This can be beneficial for those who are looking to supplement their income or those who prefer the flexibility of working additional hours when needed. However, it's important to note that hourly employees may also experience fluctuations in their income, depending on the number of hours worked.

To provide a clearer comparison between salary and hourly pay, the table below outlines some key differences:

Another significant difference between hourly and salaried pay structures is the employee benefits. Salaried employees typically receive benefits such as health care, paid time off, and retirement plans. Hourly employees may have to negotiate benefits or pay for them out of pocket. Another important difference is the ability to earn overtime. Hourly employees are often eligible for overtime pay, while salaried employees typically do not receive overtime pay. Understanding these differences can help you determine which pay structure would be most beneficial for you.

Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) is a federal law that outlines standards for minimum wage, overtime pay, and child labor. The FLSA aims to protect the rights of workers and ensure that they receive fair compensation for their work. It is important to understand the FLSA as it determines whether employees should be paid a salary or an hourly wage based on their job duties, salary level, and salary basis. In general, employees who earn a salary are exempt from overtime pay, while those who earn an hourly wage are nonexempt and eligible for overtime pay.

An exempt employee is a person who fulfills certain requirements as specified by the FLSA. These requirements entail receiving payment on a salary basis and performing specific job duties. Exempt employees are frequently individuals who work in executive, administrative, or outside sales capacities.

In order to be classified as an exempt employee, you need to pass three main “tests:” the salary level test, the salary basis test, and the job duties test. The first test, salary level, requires that you earn at least $455 per week. The salary basis test means that you receive a fixed amount of pay each week, regardless of the number of hours you work. Lastly, the job duties test determines whether your job responsibilities meet the criteria for exemption.

It's important to note that simply being paid a salary does not automatically make you exempt from overtime pay. Your job duties and salary level must align with the FLSA guidelines to be classified as an exempt employee.

Pros And Cons Of Being Salaried

Let's now look at the pros and cons of being a salaried employee:

Pros

• Predictable, fixed income: Predictable pay makes it easier for you to create a budget, because you know exactly how much money you will have each month and can plan your expenses accordingly. This predictability gives you a sense of stability and security, enabling you to confidently allocate your funds towards essential expenses such as rent or mortgage payments, utilities, groceries, and transportation costs, as well as saving toward your goals.
• Benefits packages: Employee benefits refer to the additional perks and compensations that a company provides to its employees, in addition to their base wage or salary. Common inclusions in a benefits package include various insurance programs, retirement packages, and paid time off for illness and vacation.
• Paid time off: Paid time off (PTO) is a benefit offered by many companies. PTO provides employees with a certain amount of time off work while still receiving their regular pay. PTO policies vary from company to company, but they typically include a combination of vacation time, sick leave and personal days.

Cons

• No overtime pay: Companies are not required to pay overtime to salaried employees, but some choose to do so. However, even if you work more than 40 hours a week, you may not be eligible for overtime pay.
• Less transparent pay scale: Some companies may be less transparent about the salary ranges they pay for certain positions, depending on local and state guidelines.

Pros And Cons of Being Hourly

Let’s take a look at the pros and cons for being paid hourly as an employee:

Pros

• Overtime pay: Being paid hourly with overtime pay means that you have the potential to earn more money.
• Clear work-life boundaries: When you are only getting paid for the hours you actually work, it can motivate you to be more efficient and productive during those hours. This can lead to a better work-life balance, as you are encouraged to get your work done in a timely manner and then enjoy your time off.
• Potential for flexible work hours: Hourly wages can be attractive for employees who value flexible work schedules. With hourly wages, employees can work fewer shifts or only on weekends, allowing them to balance their work and personal life more effectively. This option is particularly beneficial for employees who are pursuing education or training, caring for dependents, or simply seeking a better work-life balance.

Cons

• Unpredictable income: When you're an hourly paid employee, you know that your income can be quite unpredictable because it all depends on the number of hours you work. This unpredictability can make it harder for you to determine how much of your paycheck to save. Some months, you may earn more than expected, while other months, you may earn less.
• Fewer benefits: Hourly employees may have to pay out of pocket for health insurance premiums, if it is offered through their employer at all, and may receive a healthcare plan with limited doctor options and patient choices. Hourly employees are also less likely to get 401(k) matching or other retirement savings options, depending on their company.
• Unpaid time off: Hourly employees may not have any paid time off, unlike salaried employees typically do.  

Is Salaried Better Than Hourly?

When it comes to employment, the choice between being salaried or an hourly employee can have a significant impact on one's overall experience. While many employees may prefer the stability and predictability of a salaried position, there are certain advantages to being an hourly employee, depending on the specifics of the role and your lifestyle.

When Salaried Might Be Better

When choosing a job, it is important to consider if the company offers employee-sponsored benefits like health care plans. For people with medical conditions that need regular medical attention, a salaried position may be more likely to come with a comprehensive health care plan through the employer. This can bring peace of mind and financial security, as medical expenses can be a significant burden for those without adequate insurance coverage.

Additionally, salaried work may offer more stability and predictability in terms of income. With a fixed salary, employees can have a clearer understanding of their monthly earnings, making it easier to budget and plan for future expenses. This can be especially beneficial for individuals who have financial commitments, such as mortgages or student loans, as they can rely on a consistent income to meet their obligations.

It's important to keep in mind that everyone has their own priorities and circumstances. While salaried work may be more beneficial for some people, there may also be situations where hourly work is a better match. Therefore, it is crucial for individuals to evaluate their own needs and preferences thoroughly before making employment decisions.

When Hourly Might Be Better

Hourly work might be more beneficial to someone looking for part-time employment. If you have other commitments or responsibilities that require your attention, such as pursuing higher education, taking care of family members, or working on personal projects, part-time hourly work can offer the flexibility you need. By working on an hourly basis, you can choose when to work, allowing you to balance your other commitments effectively.

Another situation where hourly work might be preferable is when you are looking for a side hustle. Perhaps you have a full-time job that provides a stable income, but you want to explore other interests or earn some extra money on the side. Hourly work can provide an opportunity to pursue these interests while still maintaining your primary source of income. Whether it's freelancing, offering tutoring services, or working at a retail store, hourly work allows you to set your own hours and dedicate time to your side hustle.

While hourly work can offer flexibility and cater to specific needs, it's important to consider other factors as well. Hourly work may not always provide the same level of stability and benefits as full-time employment. Factors such as healthcare coverage, retirement plans, and job security should be taken into account before deciding if hourly work is the right fit for you.

FAQs About Salary Vs. Hourly Pay

Let's take a closer look at the differences between salaried and hourly pay by looking at some frequently asked questions.

How much is $50K a year hourly?

The average person in the United States typically works a 40-hour workweek. This means that if they are earning an annual salary of $50,000, their hourly wage comes out to be $24.04 per hour ($50,000/(52 weeks in a year X 40 hours in a workweek)). It is important to note that this is just an average, and different professions and industries can have varying work hours and wages.

Do you pay more taxes as a salaried employee or hourly?

In most cases, it doesn't matter how your compensation is structured, the tax rate on your income will always remain the same. Whether you receive it as salary, hourly wage, bonus, or any other form of compensation, it will be subject to the same tax rate.

How does salary pay work if you miss a day?

When you miss a day of work, your salary pay may be affected depending on your employer’s PTO policy. It is important to check your employment contract or consult with your HR department for specific details regarding any salary deductions for missed days.

Is there a difference in job security between salaried and hourly positions?

Salaried positions often offer more job security as they typically come with annual contracts or long-term agreements. In contrast, hourly positions are often more susceptible to fluctuations in demand and may offer less stability. However, it's important to note that job security can vary depending on the industry and position.

The Bottom Line

Understanding the difference between these two payment methods can help you make informed decisions about your work and finances. If you're on salary, you receive a fixed amount of money on a regular basis. On the other hand, if you're paid hourly, you earn money based on the number of hours you work, and you can get paid for overtime.

It's important to remember that the choice between hourly and salaried positions is an individual one. It depends on your personal circumstances, financial goals, and lifestyle preferences. Some people may prefer the stability of a salary, while others may appreciate the flexibility and potential for extra income that comes with hourly payment. No matter how you earn your money, you can take control of your financial future today using the Rocket Money℠ app.