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You’re considering transitioning from an hourly position to a full-time salary in your current or new job.
This is a big step — and one that could potentially be a tremendous step forward in your career. As such, it’s something you should carefully consider before deciding to make the leap.
Don’t automatically assume that the grass is greener on the other side with a salaried position. As it turns out, this may not be the case. Believe it or not, you could actually wind up costing yourself a significant amount of money if you don’t carefully weigh the decision.
This post explores the key differences between hourly and salaried pay and provides some tips to maximize your take-home earnings and annual income.
Key differences between hourly vs. annual salary pay
Despite what you might think, a salaried position isn’t necessarily better than hourly work. It largely depends on what you do, your skillset, and how you want to structure your time.
In fact, it’s possible you could be making more hourly than you would as a full-time employee.
An hourly position may give you more flexibility about when you work. Of course, this depends largely on the company you work for and the type of industry you’re in.
If you commit to a full-time salary, you’ll most likely need to be at your desk for at least 40 work hours or more per week. On the one hand, this can provide structure and stability. On the other, it can restrict your freedom and prevent you from taking on more work on the side.
If you receive hourly pay, you can accrue overtime hours — which is typically paid at time-and-a-half. When you work a salaried position and are legally classified as an exempt employee, you may need to work after hours, including nights, weekends, and maybe even holidays, for no extra cash.
Hourly workers typically lack the benefits that salaried employees receive. If you switch to a salaried position, you may be able to get access to amenities like health insurance, a pension, a 401(k) retirement plan, and more opportunities to earn income through bonuses. Plus, you’ll get a steady bi-weekly check, giving you a predictable monthly salary.
Salaried employees tend to have more career advancement opportunities, as they are more firmly entrenched in their organization. They also may receive better job offers.
At the same time, not every job is something worth advancing far in. If your job is just a paycheck for now and there’s no upward mobility, you may be better off on an hourly basis. Only you can make that call.
Companies sometimes offer severance packages to employees when dismissing them. However, severance typically goes to salaried employees or older individuals who might be more likely to take the company to court. Severance is usually a peace offering — it’s not unemployment insurance.
That said, not all full-time positions come with severance pay in the event of an untimely dismissal.
Converting hourly wages to salary
Before you approach your employer for a formal negotiation about switching from an hourly to a salaried position, it’s important to understand your current worth.
Start by converting your hourly earnings into an annual salary to get a rough estimate of what your hourly earnings would amount to.
TIP:Here’s a trick to do this: Simply double your hourly wage and tack on three zeros at the end. For example, if you make $20 per hour, you’ll make about $40,000. If you make $30 per hour, you’ll make about $60,000.
This rule is not an exact estimate. You’ll also have to factor in medical insurance, FICA taxes, Social Security, and any other deductions that the employer may remove. For example, if you contribute to a retirement plan, you’ll have to factor that in as well.
Of course, the calculation could also be a lower estimate of what you could actually receive by working as a salaried employee. You may be eligible for better raises or bonuses that are not available to hourly employees.
One more consideration: Many employers are now also covering home internet and phone bills for salaried workers, with remote work surging in popularity. These are the kinds of hidden perks you need to consider as you weigh your options.
Tips for hourly and salaried workers
Here are some money management tips to consider regardless of whether you are working as an hourly or salaried worker.
Work a side hustle
If you’re in a position to do so, you should strongly consider taking on a side hustle. You can bring in extra money walking dogs, babysitting, caring for seniors or people with disabilities, blogging, or helping businesses with their social media accounts. When it boils down to it, there are endless ways to bring in more money.
If you work an hourly position, it will be a lot easier to work a side hustle because you may have more time during normal working hours. If you work a full-time job, you may get stuck having to hustle at odd hours — which can deplete your energy and make it difficult to do a good job.
Set up direct deposit
Whether you’re working hourly or salaried, it’s a good idea to set up direct deposit. Talk to your company’s HR team about funneling money straight into your account so that you won’t have to worry about depositing the check yourself. This is the fastest way to get your money into your account.
If you’re in a position to save money or invest, you should also consider setting up auto-pay and transferring money into different accounts. Try and put as much money as you can aside to plan for emergencies.
Consider working as a 1099 contractor
As you consider switching from an hourly to a salaried position, you should also think about going independent as a 1099 contractor instead.
Working as a 1099 contractor can have some nice benefits if you can swing it. For example, you could potentially form an LLC and set up a solo 401(k) account to maximize tax advantages. This could also enable you to set your own hours and potentially take on more work for other companies.
You’ll have to make some sacrifices as a 1099 contractor. For example, you most likely won’t have access to employer-sponsored healthcare or paid time off. You’ll also have to work hard to justify your value. But if you have the discipline and the skills to pull it off, it could be a transformative career move.
One of the best parts about switching to a salaried position is gaining access to employer-sponsored retirement accounts. The most popular one is the 401(k).
In case you’re unfamiliar, a 401(k) is a type of plan that enables you to access tax-free or tax-deferred growth, depending on whether you select a Roth 401(k) or traditional 401(k), respectively.
Employers often make regular contributions to 401(k) plans, providing a way to make more money from your job and save for retirement at the same time.
How hourly employees can save for retirement
If you are working hourly, you can still access tax-advantaged retirement savings by setting up an individual retirement account (IRA) with either a Roth IRA or traditional IRA.
The major difference is that IRAs have much smaller contribution limits. The contribution limit for an IRA is $6,500 for 2021, while you can put up to $19,500 in a traditional 401(k).
If you decide to take an employer-sponsored 401(k) plan, you could still set up an IRA as well.
Frequently Asked Questions
Where can I find a paycheck calculator or salary calculator?
SmartAsset offers a federal paycheck calculator, which you use as a converter to determine your expected pay rate per paycheck or annual wages.
The calculator is easy to use, and it takes into account local, state, and federal tax rates.
Check it out here.
Is it bad to work for an hourly rate?
There is nothing wrong with working an hourly wage. It can actually be beneficial depending on how much you’re making and the total number of hours you’re putting in during the average workweek.
For example, 1099 freelancers often work an hourly wage when completing assignments for clients. Others work on retainer or charge a flat per-project fee.
Whether an hourly rate works for you largely depends on your preferences and how much the organization is willing to pay you.
What is a good annual salary?
It’s impossible to say what a good annual salary is. This is a very personal thing — and something that only you can decide.
One of the most important lessons that you’ll learn in your personal finance journey is that you can’t compare yourself to anyone else. Where you work, how much you work, and how you work is your decision and your decision alone.
Can salaried workers receive overtime?
It largely depends on the company that you work for and what you’re doing.
Frequently, salaried workers need to put in extra hours without extra pay. This can be demotivating and stressful. However, it’s sometimes non-negotiable.
That said, the smart thing to do is keep track of all the extra hours that you put in and use that to your advantage when asking for a raise or promotion. If you document your work, the company is more likely to give you a bump in pay or more responsibility.
How can I avoid working minimum wage?
Working minimum wage can make life very difficult. However, there are things you can do to bring in more money.
The first step is to recognize your value. Think about your core skill set and what you can offer for the company that other people in your position can’t.
For example, maybe you have leadership skills or an ability to connect with customers and get them to make more purchases. If so, you may be better suited for management or sales than hourly minimum wage work.
If you’re in this position, talk to your manager if possible or request a meeting with someone in the company who may be able to further your career. Don’t be afraid to ask for advancement when the time is right. If you receive it, make sure a bump in pay follows.
In the meantime, consider bringing on a second job or a side hustle. Just because you make minimum wage at one job doesn’t mean that should limit you in another role. Keep working hard, keep advancing yourself, and good things will follow.
The Bottom Line
It’s not always easy determining if you should work hourly or ask to be paid on a salary basis. If you have the choice, you should carefully weigh your options and think about what’s better for your specific needs.
Working in a salaried position may seem like a dream come true at first. But you may also find it restrictive and limiting — especially if the company tacks on a bunch of extra rules governing what you’re allowed to do.
Often, companies make employees sign exclusive contracts when switching to salaried positions. So, that steady paycheck may require a level of sacrifice that you’re not comfortable with.
Ultimately, this is a financial decision. Determine your hourly rate and make sure that whatever salaried position the company is offering is commensurate to what you would otherwise receive in take-home pay with an hourly job.
At the end of the day, you should care more about your annual income than whether you are hourly or salaried. The more money you make, the easier it will be to achieve true financial independence.