How does a business determine the best payroll system for their employees? One of the first steps involves understanding the various options, including an annualized salary.
An annualized salary payment method is useful in various circumstances, offering benefits to both employers and employees. As leaders in global payroll solutions, we’ve put together an overview of an annualized salary and how it can work for you — let’s get started!
What is an annualized salary?
An annualized salary refers to a predetermined gross pay per month, paid to an employee throughout 12 months of the year. Ultimately, these monthly payments totals an estimated yearly earning.
A salaried employee earning an annualized salary is paid a fixed and equal set amount each month regardless of the number of hours worked. As a result, the employee receives a regular paycheck each month.
Benefits of an annualized salary
When the pay period remains the same, it helps both businesses and employees in the following ways.
- Employees receive a regular paycheck for budgeting purposes
- Businesses can spread out the cost of taxes, insurance, and other employment benefits
- It’s easier for businesses to calculate payroll deductions or distributions
Which companies use annualized salaries?
Several industries choose to pay annualized salaries to benefit both employees and employers, especially when it comes to budget. The payment method is effective for full-time employees, part-time employees, and hourly wage workers alike.
For example, school teachers are often paid an annualized salary to ensure regular payment even during the extended summer breaks.
Annualized salary vs. annual salary
Don’t confuse an annualized salary with an annual salary. Nuanced differences exist and impact the measurement of employee earnings.
An annual salary is the total yearly income, usually based on a 40-hour workweek. However, it can also be a fixed amount as determined in the employment contract, regardless of how many hours are worked each week. As a result, overtime pay isn’t usually considered in the calculation.
In contrast, an annualized salary is an estimated annual salary as determined by how much time an employee spends on the job and their wage payment method.
Whenever calculating salary, for a full year or not, it’s important to consider the Fair Labor Standards Act, minimum wage, and local compliance requirements.
What is annualized compensation?
Annualized compensation plays a key role in the annualized salary payment method. Essentially, annualized compensation is a combination of an employee’s annualized salary as well as any other financial benefits offered by the company.
These financial employee benefits include, but are not limited to, the following;
- Health insurance
- Dental insurance premiums
- Commissions and bonuses (in addition to the base salary)
- Disability insurance
- Life insurance
- Retirement plans
- Sick leave (and paid time off)
- Child care assistance
Annualized compensation helps employers better understand employee valuation. It assesses whether the employee is being fairly compensated for their contribution to the company.
Salary insights tools also play a valuable role in determining employee compensation, ensuring that the organization is fair and competitive in its offerings.
There is a difference between annualized salary and annualized compensation. For example, the IRS considers an employee’s annualized compensation as taxable income, impacting how much taxes are paid.
It also impacts employer/employee matched contributions, such as certain retirement plans which limit contributions based on compensation as opposed to salary.
How do you calculate annualized salary?
While an employment salary calculator makes it easier to choose a new hire, you still need to carve out time to calculate an annualized salary.
Begin by following these steps:
- Determine the employees earned income
- Divide the earned income by the number of months worked to determine the monthly income
- Multiply the monthly income by 12 to determine the annualized salary
Let’s consider a real-life example:
- Imagine that John worked as an online tutor from March 1 until June 30, earning a total of $16,000 during the four months
- Based on this figure, John’s monthly income is $4,000
- When multiplied by the 12 months of the year, John’s annualized salary is $48,000
If the employee is paid an hourly rate, then the formula changes slightly and is calculated to the number of weeks in the year. Follow this formula for hourly workers.
- Determine the number of hours worked per year
- Multiply the number of hours by 50 (accounting for two weeks of vacation time)
- Multiply the total hours by the hourly salary
A take-home pay calculator is a valuable tool for HR managers, especially those managing diverse teams.
Streamline payroll with Deel
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