Salary vs. hourly wage: Everything you need to know

When hiring a team, one of the most important decisions you have to make is how to pay your employees. The two most common payment methods are hourly wage and salary. Here’s a look at the pros and cons of hourly wage vs. salary and critical details to consider when deciding how to pay your valued workforce.

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

Hourly vs. salary pay

If you’ve ever had a job, you’re probably familiar with the various methods of getting paid. Hourly workers are paid for the time they work, while salaried employees are paid a fixed amount regardless of working hours.

Hourly pay

• Payment is based on the number of hours worked.
• Workers are generally eligible for overtime pay.
• Suitable for part-time or full-time employees.
• Hourly payroll is more flexible but difficult to predict.

Salary pay

• Payment is the same every pay period, regardless of hours worked.
• Workers may or may not be eligible for overtime pay.
• A good option for full-time employees rather than part-time employees.
• Payroll for salaried workers is more predictable but less flexible for businesses.

Eligibility for overtime pay can be complex. Criteria for whether someone can be classified as an exempt or non-exempt employee are based on position, how they’re paid and the industry. Learn more about whether employees qualify for overtime pay in our exempt vs. non-exempt guide.

Hourly pay: Pros and cons

Pros

• Lends flexibility to operations. 
• Allows for close cost control. 
• Overtime is available for most hourly employees.

Cons

• May align with higher turnover. 
• Comes with enhanced administrative requirements. 
• May require more tools for managing variable pay.

When paying employees by the hour, managers can quickly scale up or down depending on business needs. Busy and slow seasons often require different staffing needs. For example, increasing workers’ hours is a flexible way to manage seasonal business during the holiday season. 

During busy seasons, hourly workers are often more willing to work those extra hours than salaried employees because they’re paid more when they work overtime. However, if the budget is strained, businesses can cut back on labor hours more easily with hourly employees. 

However, hourly employees may see their jobs as less stable and so be more likely to leave for other opportunities. In turn, hourly workers are often less committed to their employer than salaried employees who can predict the value outcome of their time and commitment. 

In addition, it takes more resources to track employee hours and manage payroll for hourly employees. While salaried employees receive a set amount every pay period, businesses must track hours worked by hourly workers and ensure that time is accurately recorded to process variable paychecks each pay period. This requires extra resources, such as payroll software with time and overtime pay calculation capabilities.

As you can see, hourly employees are a good choice in some circumstances but could be better in other situations. Also, as your workforce grows and becomes more specialized, hiring some roles as hourly and some as salaried can help your business remain agile.

Salary pay: Pros and cons

Pros

• Offers more operational consistency.
• Lends to easier budgeting.
• Can produce higher employee engagement. 
• Involves less administrative work. 

Cons

• Can increase costs. 
• May lend to a higher risk of employee burnout.

Salaried employees often see their work as stable. Both you and the employee have a general idea of when they’ll be working without worrying about hourly schedules. In turn, they may be more committed long-term than hourly employees. 

In addition, salaried, full-time employees are often more engaged and less likely to change jobs frequently. Hiring and training employees is expensive, and higher long-term engagement can lead to significant savings.

Salaried workers have extremely predictable pay schedules. This means that, as wages are fixed regardless of working hours, you can budget for salaried employees with a higher degree of accuracy. While you’ll still need payroll systems, many managers don’t have to track hours, schedule shifts and manually approve overtime and payroll every pay period for salaried workers. This layer of predictable accuracy may mean that basic payroll software will meet your needs as time tracking, shift management and overtime notification tools that are included in premium software are more important for the varying schedules of hourly workers.

Just be careful to find a good balance: If you press salaried workers to spend more than 40 hours per week in the office, you may not have to pay more; however, overworking employees can lead to burnout and poor performance or higher turnover. 

In addition, salaried workers often command higher total pay, plus benefits. Insurance and other common benefits can be expensive, particularly for small companies. And, while very small companies may not be required to offer health insurance for employees, most salaried employees expect this benefit and may leave for a competitor if their pay package is not competitive.

Other wage options 

If you don’t want to hire employees, you may find other arrangements that can be beneficial. Finding a win-win agreement is essential for the health of your business.

• Gig workers: Companies like Uber and Grubhub rely on workers who are paid per service item performed. Also known as gig workers, pay is highly correlated with performance for this portion of the workforce. However, workers may not be reliably available, as they’re not scheduled like hourly or salaried employees.
• Contractors – project rates: Freelancers often take on some tasks on a per-project basis. These contractors are small business owners who provide specialized services and consulting for a flat, predictable rate for agreed-upon projects. Examples include graphic designers or resume writers.
• Contractors – hourly: Hourly freelancers take on projects or longer-term roles. An example is a freelance project manager. It’s important to understand federal and state employment laws to ensure you don’t misclassify workers as contractors when they’re legally required to be classified as employees.

Workers in these categories are not employees of your business, so your company won’t have to pay overtime, unemployment insurance or employment taxes. However, miscategorizing them as freelancers or gig workers can land your business in legal trouble. Penalties can range into the thousands of dollars and even come with jail time. 

Learn more about how to avoid such consequences in our W2 vs. 1099 guide.

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

Frequently asked questions (FAQs)