How Does Salary Work? A Complete Guide

Have you ever wondered how salary works? There are all kinds of jobs in the world—and different ways to pay the people who do them. For example, some might do freelance work in today’s gig economy, some might make an hourly wage and some may earn a fixed salary. A salary is one of the most common forms of pay.

When someone receives a salary, this means that they aren’t paid an hourly rate. Instead, they are paid a set annual rate that the company breaks up into paychecks, typically every other week or month. Along with the money they receive in their paycheck, they often also get benefits.

Typically, salaried employees don’t keep a timesheet since they receive a fixed amount of money despite how many hours they may work.

What is a salary?

A salary refers to a fixed amount of money or compensation that employees receive every year from their employer in return for their work. Though you often earn this regular payment on a monthly or biweekly basis, you often express your salary as an annual sum. The amount of salary you earn depends on things like your employer, your level of experience, industry standards and your geographic location.

While salary and annual income may sound like the same thing, they’re often different. That’s because a person’s annual income includes all the sources of income they earn in a year. This can include things like the salary, tips and bonuses someone earns at their job. It can also include earnings from things like:

Social Security benefits
Pension plans
Government aid such as welfare and disability assistance
Alimony and child support
Income made from rental properties

What does a salary include?

Along with bi-weekly or monthly paychecks that average out to the same amount each time, a salaried employee typically receives benefits and other job perks. A salary may include the following benefits:

Sick days
Paid vacation
Paid holidays
Medical insurance
Dental insurance
Vision insurance
Life insurance
Matched retirement contributions
Maternity leave
Company stock

How does salary pay work?

Workers typically fall into two categories—exempt and nonexempt. Exempt employees generally earn a preset salary, while nonexempt employees most often earn an hourly wage. However, there are exceptions where salaried employees might still be considered non-exempt.

Here are some specifics around salary and hourly compensation:

Exempt employees. Exempt employees typically earn a fixed salary and are exempt from the guidelines created by the Fair Labor Standards Act (FLSA). The FLSA establishes standards for minimum wage, overtime pay and more.
Nonexempt employees. The FLSA requires that employers pay their covered nonexempt employees the current federal minimum wage of $7.25 per hour—or their state’s minimum wage if it’s higher. Employers are also required to provide them with overtime pay when they work more than 40 hours a week.

Calculating your salary as an hourly rate

Even salaried workers may sometimes want to know how their paycheck translates into an hourly rate — for instance, when they’re exploring jobs that pay by the hour.

To calculate your salary as an hourly rate, you generally divide the amount you make per paycheck by the number of hours you worked in that pay period.

Advantages of earning a salary

Earning a salary includes the following advantages:

More predictable pay

If you stick to a strict budget, then getting paid a salary is ideal for you. That’s because you can expect the same amount of money each paycheck and plan accordingly. Even if work is slow, you’ll still receive that same amount of cash whereas, with an hourly job, your hours and payment would simply be cut. Likewise, employers have a payment calendar, so you’ll know exactly when your next paycheck is coming.

Oftentimes, employees set up direct deposit so the money goes straight to their bank account.

Receiving benefits

A major perk of a salaried job is that you are likely to get benefits from your employer. Since insurance expenses can quickly add up when you’re paying for them on your own, such benefits can actually save you a lot of money. Likewise, getting paid time off is a major benefit so you can still get paid if you were to take a sick day or go on vacation.

An hourly employee could take time off, but they wouldn’t be compensated for it.

More opportunity for growth

Working a salaried job can be worth it for the career opportunities you’re exposed to. Oftentimes, salary jobs come with a lot of responsibilities, meaning that you’ll get to develop many different skills. It’s also likely that you have a higher chance of being promoted within a company that has salaried positions.

That’s because management and other leadership roles may need someone with full-time experience.

Disadvantages of earning a salary

Of course, there are some downsides to earning a salary, including:

No overtime compensation

It’s quite rare for an employer to pay salaried employees overtime. As an hourly worker, you can get paid overtime if you work more than 40 hours in a week. Many businesses pay time and a half for overtime pay, making it more of an incentive to take on additional hours. If you were to work more than 40 hours in a salaried position, you’re technically getting paid less if you were to divide your paychecks by the hours you’ve worked.

No holiday pay

Although many salaried employees benefit from paid holidays, they usually do not have the opportunity to be paid extra for working holidays. Many hourly employees have the opportunity to make time and a half on holidays, with some employers paying double or triple time for bigger holidays.

More difficult to create a work-life balance

Since you don’t technically clock in and out of a salaried job, you may find it more challenging to separate your work life and home life. Salaried employees tend to be more susceptible to taking work home, answering messages outside of business hours, or staying at the office late.

Salary vs. Hourly Pay

Hourly pay is the rate paid per hour of work. Employees who are paid by the hour are eligible for overtime pay equal to their base wage plus 50%. A salary is a specific amount of compensation regardless of the number of hours worked. Employees who are paid a salary are not eligible for overtime pay.

You’re paid for all the hours you work if you’re an hourly employee. Your employer must pay you more if they want more of your time. Legal overtime is time and a half and some employers may pay double time for holidays. This isn’t mandatory, however, unless it’s part of a contract that covers your job. You could bring home more than if you earned the same official pay on a salaried basis if you’re in a well-compensated field with lots of available overtime.

There’s also an effect on lifestyle. Hourly employees can find it easier to separate home and work. They can concentrate on family, hobbies, or a second job when their work is over for the day.

Unfortunately, being paid hourly also makes you more vulnerable. Hourly employees often feel the impact first when laws change or their company goes through tough times. It’s easier for an employer to knock off some of your hours until business improves than it is to eliminate an entire salaried position. Hourly employees protected by a union may be protected against some of these risks, however.

There also are possible effects on eligibility for healthcare coverage. Businesses with 50 or more employees are required to provide healthcare to full-time employees, who are defined as people working 30 or more hours. Some businesses keep hourly employees to fewer than 30 hours to avoid this mandate.

Difference between salary and hourly pay

Salary vs. Hourly: Key Differences
Salary	Hourly
Guaranteed weekly wage	Pay varies based on the hours you work
No overtime pay	Overtime pay at the rate of time and a half for each hour worked over 40 hours
Employer-sponsored benefits such as healthcare coverage, paid vacation, and sick days	May be responsible for their own health insurance and they’re not paid except when working
Harder to separate work from personal time	Can leave work behind when not on the job
Salary comes with a sense of job security	Employers can more easily cut your hours if they choose to

Tips for negotiating your salary

When getting a job offer, you may want to negotiate the terms of your employment to ensure you are being compensated fairly. This means that you may need to discuss your salary and aim for higher pay. Follow these steps when having this conversation with an employer:

Research your job title

Learn what other professionals with your job title are making so you know a fair salary to negotiate for. Using Glassdoor’s job search feature gives you the ability to research companies and compare salaries.

Ask questions

Inquire about your potential employer’s expectations to get a better idea of the work you will be doing. Once you’re at a job for a while, you could even ask them what you would need to do to get the salary you have requested. This tip is especially helpful for employees who are looking for a raise.

Getting regular feedback can help you improve your efforts and heighten your chances of a raise.

Set your range

Rather than going into the conversation with one number, pick your ideal compensation and your absolute minimum. You can determine these numbers based on your financial needs, geographic location, professional experience and background, and level of education.

Consider negotiating benefits

Oftentimes, your benefits are just as valuable as the money you’re making. Employers may be more apt to give you additional paid time off or educational opportunities if you show how you can add value to their company.

Be polite yet firm

If you really need to make more than they initially offer, you may need to be firm on your request. Of course, continue to maintain a sense of professionalism so you can continue to have a good relationship with the employer.