Salary vs. Hourly Rate: Definitions and Differences

Regardless of the size of your company or its activity, you must compensate your employees, whether they are full-time or part-time, in return for their work. 

Depending on the employment agreement, there are two methods to reimburse your workers: 

  • A salary: compensation for full-time, permanent work, regardless of the number of hours worked.
  • An hourly rate: is specific to flexible schedules, where employees receive their money based on the exact number of worked hours. 

However, the amount of money you transfer to your employee's bank account is not the only difference between the two methods: there are also taxes, benefits, and contractual arrangements that differ depending on the type of payment.

Knowing the differences between salaries and hourly rates is crucial for:

  • Employers to make the right hiring decision for the company;
  • Employees to determine what fits their current needs best.


1.    What is a salary?

  • Advantages of a salary
  • Disadvantages of a salary

2.    What is an hourly rate?

  • Advantages of an hourly rate
  • Disadvantages of an hourly rate

3.    Key differences between salary & hourly rate

4.    Wrap up

5.    Frequently asked questions

Let's dive in!

1.    What is a salary?

A salary is a consistent amount of money you pay an employee, usually working for an undetermined period in a full-time position. 

As a rule, salaried employees receive a payment monthly. However, in certain circumstances, you can remunerate your employees' work semi-monthly, bi-weekly, or weekly. 

Whatever payment schedule you choose, you must agree on it before onboarding your employee and state it clearly in the employment agreement. 

Usually, the salary consists of a fixed amount per year, which breaks down into smaller sums depending on your payment periods. The resulting amount for a pay period (a month) is your employee's gross salary, from which you deduct mandatory and voluntary taxes and contributions to calculate their net pay.

For example, if you earn a $48,000 annual salary, you'll earn $4,000 every month before taxes. This is called gross pay, while net pay is the amount earned after taxes.

Remember that you might get paid weekly, bi-weekly, semi-monthly, or monthly - depending on the pay period. The example provided is for monthly wage payments.

Advantages of a salary

Fixed pay

The amount of money you deposit in your employees' bank account at the end of each month is independent of the number of worked hours. While it may not be the same amount monthly, fluctuations are within moderate limits. This predictability allows you to create the most accurate budget. 

Regular pay

A salary is usually paid monthly or semi-monthly. This consistency helps your employees gain control over their earnings and better schedule their payments. The stability of payments increases overall job satisfaction.

More benefits

While the law doesn't restrict the number and types of benefits you can provide, salaried employees often get more consistent benefits packages, including PTO (paid time-off), paid sick days and maternity/ paternity leave, childcare reimbursements, etc. 

Increased trust

Permanent full-time employees are the most eligible to receive a salary. Working a fixed schedule means they are dependable and trustworthy. You can count more on their skills and expertise and give them additional roles, tasks, and responsibilities. 

Related: You might be interested in the differences between a full-time and a part-time position.

Disadvantages of a salary

No overtime 

As an employer, you are not legally required to pay overtime to your salaried employees. While some companies may pay overtime, most of them compensate for the additional worked hours with time off. This leads to workforce disengagement, as employees work more without being paid accordingly. 

What are the advantages and disadvantages of overtime? Let's find out.

More stress

Working a fixed schedule, say 40 hours a week (and possibly more), means more tasks, responsibilities, and time, which usually is not reflected on your salaried employees’ paychecks. The extra effort leads to frustration and stress among your workers.

Less flexibility

Salaried employees must stay in the office until the end of working hours, even if they have already completed their work. Lacking flexibility encourages presenteeism and affects the team’s productivity. 

Tracking performance

Salaried employees have the same working schedule for long periods. As they don't have to track their hours, it may be difficult for you, as an employer, to track their performance. In this situation, it is more beneficial to your company to evaluate performance based on results rather than working hours. (Read our article about OKR - Objectives and Key Results for inspiration).

2. What is an hourly rate?

An hourly rate, as the name implies, represents the compensation you pay your employees for each hour of their work. 

If you want your hourly employees to work more, you must pay them overtime. The hourly rate for overtime is time and a half or even double if you need your workers for holidays. 

When paying your employees by hour, the rate must include the basic salary, benefits, taxes and deductions, and overtime. 

For example, if you work 20 hours and 30 minutes, you will get paid for 20.5 hours. Now, if your hourly rate is $15.50, then you will be paid $317.75 for your time ($15.50 x 20.5).

Related: Interested in calculating salary per hour? We have an in-depth guide to help you find the answers you need with multiple examples.

Advantages of the hourly rate


Hourly payment means you pay each hour of your employees' work. You must pay overtime when you need your workers' expertise and time beyond the "normal" hours. Paying your employees according to their efforts motivates them and increases the team's productivity. 

Tip: You might find the overtime calculator helpful.

Cost efficiency

Paying employees by hour allows you to schedule the exact number of workers and hours you need, leading to cost savings with offices' utilities and supplies. Also, hourly employees cost less as they are not eligible for certain benefits.

Attract top talent

Hourly paid employees decide how many hours they work and what time. Setting their schedule enables them to pursue other interests, cultivate personal or professional growth, or spend more time with their significant ones. This autonomy empowers your workforce and attracts top talent, especially from Generation Z. 

Disadvantages of the hourly rate


The amount you transfer into your employee's bank account depends on the worked hours. The hourly wage fluctuation is unpredictable. You may find it difficult to budget and anticipate overhead as an employer. 

High turnover rates

Hourly employees may leave your team for a salaried position as it offers better benefits and high pay security. Their choices increase your company turnover and costs related to recruiting new talents. 

3. Differences between salary & hourly 

The differences between the two types of payment are the following:


Hourly rate

Guaranteed monthly wage

Depends on the number of worked hours

No overtime guaranteed

Each additional hour is paid at the rate of time and a half

Employer-sponsored benefits such as health care, retirement, and PTO

The employee may be responsible for paying some benefits

Difficult to maintain work-life balance

The work ends when the employee clocks out

Salary brings a high sense of job security

Employers can reduce the number of working hours depending on their needs

4. Frequently asked questions

Which one is better: salary or hourly rate?

There is no incorrect answer to this question. Both payment types have pros and cons. Your choice depends on different aspects, such as the industry, your company size and budget, location, etc. 

Does the income tax differ depending on the salary or hourly rate?

No. The state law where you operate and pay your employees' wages establishes the income tax. Its percentage remains unchanged regardless of how you structure your payments.

Is the benefits package different for salaried and hourly paid employees?

Yes. Usually, salaried employees are eligible to receive a more comprehensive benefits package. 

5. Wrap up

It is fundamental for both parties - employers and employees - to grasp the complete advantages and disadvantages of salary and hourly employment. 

Knowing the differences between salary and hourly rate helps companies and individuals make better decisions regarding the type of work that suits them best.