An annualized salary is an estimate of how much an employee will earn over a year based on their wages and time spent on the job.
Employees with an annualized salary receive a fixed and equal wage within each paycheck, which determines the total expected yearly earnings.
Employers often calculate annualized salaries for hourly or part-time employees who do not work a full year but want to be paid consistently throughout the year. An annualized salary also helps employers pay taxes and administer employee benefits.
Annualized salary vs. hourly salary
An annualized salary is an employee’s estimated salary for an entire year based on their wages and actual time spent on the job, whereas an hourly salary is the amount of money an employee earns each hour they work.
Annualized salary vs. annual salary
An annualized salary estimates an employee’s full-year pay based on their payment rate and the number of hours they work, including overtime. Organizations often use annualized salaries when hours vary significantly from season to season to ensure that their employee’s income remains stable throughout the year.
By contrast, an annual salary is a fixed, guaranteed amount that an employee is paid over a year, regardless of the number of hours they work. Organizations use annual salaries for employees with predictable yearly earnings. An annual salary is paid in equal installments, such as monthly or biweekly, and does not consider overtime pay.
Annualized salary vs. annual compensation
An annualized salary only includes an employee’s base pay, whereas annualized compensation consists of the employee’s base pay and any other global benefits, remuneration, and non-wage perks the employer offers. These include health insurance, bonuses, retirement plans, gym memberships, equity, and paid time off.
Annualized compensation provides a more accurate and comprehensive representation of an employee's total salary.
Read more: How to Create a Global Compensation Strategy
Is annualized salary gross or net?
An annualized salary is the employee’s predetermined gross pay. Gross pay is the employee's total income before taxes and other deductions are withheld, and net income is the employee’s total income after taxes and other deductions are withheld. Net income is also referred to as the employee’s take-home pay.
When to use annualized salary
Employers typically calculate annualized salaries for hourly, part-time, or seasonal employees who do not work a full year. It’s commonly used in industries like retail, healthcare, and education where work fluctuations are common throughout the year.
An annualized salary allows an employer to spread out the cost of taxes and employee benefits and also provides the employee with consistent pay over the year.
For example, teachers often only work 10 months per year, so they have annualized salaries. Teachers receive regular paychecks even during their summer break, ensuring a relatively stable income throughout the year.
Why should employers use annualized salaries?
Annualized salaries help employers determine more accurate budgeting and forecasting, which is useful for companies with fluctuating workloads or employees who don’t work an entire year.
Annualized salaries make it easier for businesses to calculate payroll deductions, spread out employer contributions and benefits, and determine how to best manage payroll and payroll compliance.
Annualized salaries also give an employer a better understanding of employee costs and whether their talent is fairly compensated for their skills, time, and experience.
How to calculate annualized salary
To find the annualized salary for an employee, an employer must determine either the employee’s earned income or hourly rate.
If using the employee’s earned income, divide the earned income amount by the number of months in a year. Then multiply that number by 12 to get the annualized summary.
For example, let’s say an employee earns a total of $20,000 over four months. Their monthly income is $5,000 (20,000 / 4). When multiplied by 12 months (5,000 x 12), the employee’s annualized salary totals $60,000.
Alternatively, to calculate the employee's annualized summary using their hourly rate, multiply the employee’s hourly wage by the total number of hours they are expected to work in a year.
For instance, there are approximately 2,080 hours in a typical work year. If an employee makes $20 each hour, their annualized summary is $41,600 (20 x 2,080).
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