What Is the Difference Between Salary and Wages?

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In workplaces throughout the United States, companies’ employees are often categorized as salaried workers or hourly workers. Salaried workers, as you might guess, are paid salaries, while hourly workers are paid wages. Though the terms “wages” and “salary” are sometimes used interchangeably, there are some key differences between the two that are important to understand.

“Salary” and “wages” don’t just refer to the ways employees are paid, either. Depending on the company, there are different expectations, benefits and requirements for both types of workers. Continue reading to find out what constitutes a salaried employee versus an hourly employee, along with several advantages and disadvantages you can expect with each.

What’s the Difference Between a Salary and Wages?

Wages typically refer to hourly rates for pay. An hourly or “non-exempt” employee gets paid a certain amount of money per hour. Weekly or bi-weekly wages are calculated by counting the number of hours the employee worked during a specific time period and multiplying the number of hours by the worker’s hourly pay rate. In the United States, all states have their own individual minimum wage levels for hourly pay, depending on the state and its cost of living. The federal government also has a minimum wage level, and states are required to pay at least that much per hour to hourly employees.

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Wages are often paid to semi-skilled or unskilled workers as they climb up the ranks at a company. A salaried (typically also called “exempt”) employee has a set annual compensation. The annual salary is divided by the number of pay periods for a weekly, bi-weekly or monthly paycheck, depending on the company. Salaried workers are often in skilled positions that require more education and experience, such as executive positions.

What Are the Pros and Cons of Hourly Pay?

Although salaried pay might sound convenient, there are also some benefits to collecting hourly pay. For one thing, employees get paid for the hours that they work, even if it’s overtime — more than their normally scheduled hours. Also, hourly employees typically have a more standard schedule, working on the clock for mainly eight hours a day if they’re employed full-time. They may also have less responsibility concerning the overall growth and sustainability of the company.

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There are some downsides to getting hourly wages, however. Often, people in hourly roles don’t get paid unless they’re at work, meaning their earnings are impacted if they need to miss work for an appointment or another reason. Also, if an employee’s hourly rate is low, they may have to rely on overtime to cover their bills. Though overtime money can be a pro, it can also be a con.

According to the Fair Labor Standards Act (FLSA), which gave employees the right to earn a minimum wage and the right to overtime pay, an employer can also require an employee to work overtime and fire them if they refuse to. The FLSA sets no limits on how many hours a day or week an employer can require someone to work, only that employees must earn “time and a half” for any overtime hours they work. This obligation can be inconvenient, especially for those who may have children, ill loved ones or other responsibilities that require their attention. It could also potentially mean being called into work on weekends or holidays.

What Are the Pros and Cons of Salaried Work?

There’s an array of benefits to having a salaried job. Often, salaried workers receive more benefits in terms of better health insurance policies, bonuses, paid vacation time and 401(k) plans. They have greater flexibility with working hours because they don’t need to clock certain hours to earn money. Though they may be expected to be present in the office or work online at a certain time, it’s more likely that they can make arrangements with an employer to accommodate their schedule — as long as their work gets done. A steady paycheck with a predictable amount may also provide a stronger sense of financial security for employees.

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In spite of these advantages, there are disadvantages to salaried employment, too. The phrase “with great power comes great responsibility” can apply to this type of work. Often, salaried employees have more responsibilities and may need to spend more hours in the office meeting them, and in many cases they’re not eligible for overtime pay. The extra work that they do is reflected in their salary and other benefits. With these extra tasks, a salaried employee may be dealing with extra pressure and stress.

Though most salaried employees don’t receive overtime, there’s the potential for salaried employees to be classified as non-exempt employees. Per a policy put into effect by the U.S. Department of Labor on January 1, 2020, salaried employees can be classified as non-exempt if they earn a certain amount or if they don’t meet certain standards for exempt classification. That rule makes it possible to earn overtime even as a salaried employee working over 40 hours.

How Do You Report Salaries and Wages on Your Taxes?

Whether you’re at the hourly level or the salary level at your job, you’ll need to pay various taxes on and from your earnings. Three federal taxes are withheld by employers for both wage and salary incomes: income tax, Social Security tax and Medicare tax. Bonuses and overtime are taxed as well and can even incur higher federal and state income taxes, depending on your income bracket.

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When it comes to reporting income on your taxes, whether you’re an hourly or salaried worker, your company should give you a W-2 form to show your total income and withholdings, according to the Internal Revenue Service (IRS). You’ll use that form to obtain accurate financial numbers to properly file your tax return. The tax rate is essentially the same for employees across the board. However, the more money you earn, the more taxes you typically pay throughout the year.

Whether an employee prefers an hourly position or a salaried position depends on their own personal preferences based on the pros and cons mentioned above. There’s no one-size-fits-all approach. When choosing a position, you shouldn’t just consider the money, but certainly all of the benefits, responsibilities and downsides that come with it and how those fit into your current and desired lifestyle.