Base Salary

What Is Base Salary?

Base salary (also known as basic salary or base wages) is the fixed amount an employee must be paid for their work as agreed upon during the hiring process. Oftentimes, it’s expressed as either an hourly rate, monthly income, or annual salary. Essentially, it's the amount of income an employee receives before other earnings or deductions are applied to their paycheck.

Additions may include:

• Bonuses
• Commissions
• Incentive-based pay
• On-call pay
• Overtime pay
• Shift-differential pay
• Special assignment pay
• Stock options

Deductions may include:

• Federal and state taxes
• Health insurance premiums
• Retirement account contributions
• Garnished wages

Base Salary vs. Hourly Rate

Salaried employees earn a fixed base wage each pay period regardless of how many hours they work.

In contrast, hourly employees must be paid for each hour they work. Unlike most salaried workers, non-exempt hourly employees are also entitled to overtime pay. This is calculated as 1.5 times their regular wage rate for every hour that exceeds a standard 40-hour workweek per the Fair Labor Standards Act (FLSA).

What Is the Difference Between Base Salary, Gross Pay, and Net Pay?

Unlike base salary, gross earnings and net wages take additions and subtractions into account:

• Base Salary: Standard rate of pay an employee receives for their work, excluding bonuses and other additional compensation
• Gross Pay: Base salary plus additional earnings
• Net Pay: Take-home pay after all earnings have been added and all taxes and other deductions have been subtracted

Base Salary Example

Jamal is hired by a company that agrees to pay him a base salary of $48,000 ($4,000 per month). When Jamal receives his first monthly paycheck, he sees:

• Base Salary: +$4,000
• Hiring Bonus: +$1,000
• Tax Withholdings: -$1,050

In this case, Jamal's monthly gross income (pay before taxes) is $5,000. Once taxes are withheld, his monthly net pay is $3,950.

Are Base Salary and Annual Salary the Same?

Base salary and annual salary may be the same, but only if an employee earns no bonuses, overtime pay, employer-paid insurance premiums, etc. However, when taking earned additional compensation into account, an employee’s annual salary can end up being significantly higher than their base pay.

How Is Base Salary Determined?

While there's no standardized formula employers use to calculate base pay, companies generally create a compensation strategy guided by factors like:

• Geographic location
• Competitors’ offerings
• Overall benefits packages
• Job position/title
• Level of experience

Keep in mind the base wage rate varies significantly between industries and professions, but it cannot be lower than the federal or state minimum wage.

How to Calculate Paycheck Amounts from Base Salary

Salaried employees receive the same fractional amount of their annual base salary every payday. To calculate your regular paycheck amount, follow these steps:

Step 1: Determine the number of pay periods in a year.

This amount will be based on your company’s payroll calendar. For example, companies that pay every other week typically have 26 pay periods in a year, and companies that pay twice a month have 24 pay periods in a year.

Step 2: Divide the annual base salary by the total number of pay periods.

For instance, if you earn $70,200 a year and are paid biweekly, divide this number by 26. The base salary in each paycheck is $2,700 before additions or deductions. At a company that pays twice a month (or semi-monthly), that same annual salary translates to $2,925 per paycheck.

How to Calculate Monthly Income

If you're paid twice a month, your monthly income will be consistent. To calculate it, you can divide your base salary by 12.

If you're paid bi-weekly, your income will be mostly consistent from month to month. However, because each month varies in the number of days and weeks, you'll receive an extra paycheck during certain months of the year.

Can Base Salary Change?

Yes, an employee's base salary can change due to increases and reductions in pay.

Many jobs have a base salary range, which consists of a minimum and maximum amount set by a company for a given position. Initially, a new hire with limited experience might receive the minimum salary within that range. As the employee gains more experience and enhances their skills, they may receive raises and gradually progress toward the maximum pay rate for their position.

While reductions in base salary are uncommon, they can legally occur during challenging economic times when a company needs to tighten its belt. Unless a labor union's contract specifies compensation, employers have the freedom to lower an employee's base salary as long as they provide advanced notice (requirements vary by state) and still pay at or above minimum wage.

However, in the absence of a contract, employees also have the freedom to leave the company rather than accept a lower base salary.