Wages

What Are Wages?

Wages are the primary form of monetary compensation for employees and are paid according to the amount of time worked by the employee.

What Are the Types of Wages?

There are five main types of wages:

Minimum Wage: The minimum wage is the lowest hourly income one can earn as mandated by law. While federal law mandates a $7.25 minimum wage, many states have higher minimum wage rates.

Living Wage: While the minimum wage is mandated by law, a living wage is not. A living wage is the minimum amount a person needs to meet their basic needs (food, housing, healthcare, etc.). Paying a living wage ensures employees earn enough income for a satisfactory standard of living and prevents them from falling into poverty. Living wage thresholds vary based on the cost of living in a particular area.

Prevailing Wage: The prevailing wage is frequently used for contract jobs between government agencies and outside businesses. Employers use it to set wage and benefit floors for a specific class of workers in a locality. For instance, security guards providing government-contracted services in Chicago may be paid the average hourly rate of similarly employed workers in that city. Prevailing wages vary across states or cities. Some examples of occupations where prevailing wages may be given include construction workers, mechanics, and urban planners.

Tipped Wage: A tipped wage is a reduced hourly pay rate for employees who engage in an occupation in which they customarily and regularly receive over $30 per month in tips. Employers must pay tipped employees $2.13 per hour in direct wages as long as that amount combined with tips equals or exceeds the federal minimum wage. If a tipped employee’s tips and direct wages fall below this threshold, the employer must make up the difference. Some states have higher tipped wages, and some require all employers to pay a minimum wage whether the employee is tipped or not.

Overtime Wage: According to the Fair Labor Standards Act (FLSA), employers must pay overtime wages to nonexempt employees for hours worked over the standard 40-hour workweek. Some common exemptions under the FLSA include commissioned sales employees, drivers, mechanics, and salaried employees who function in executive or administrative roles.

How to Calculate Wages

A wage employee is assigned a rate of pay expressed in dollars per hour of work. For instance, you may hire a new employee and agree to pay them $20 per hour.

To calculate total wages, multiply the total hours that an employee works during a pay period by their hourly rate. Suppose that you pay weekly and the employee worked exactly 40 hours.
You can calculate their wages using the following formula: 40 hours worked x $20 per hour = $800.

If the employee worked any overtime in a pay period, these wages are calculated at a time-and-a-half rate. In our example, the employee would be compensated at a rate of $30 per hour for any overtime.

How Are Wages Paid?

Wages can be paid at a variety of frequencies, but the most common are:

• Weekly (52 paychecks a year)
• Biweekly (26 paychecks a year)
• Semimonthly (24 paychecks a year)
• Once a month (12 paychecks a year)

Biweekly is the most common payment frequency. These wages are often paid the week after the work is completed.

What Are Examples of Wages?

Suppose that you have a nonexempt employee who is compensated at $20 per hour and paid biweekly. Over the previous two-week pay period, they worked 50 hours each week.

Therefore, you would compensate them for 80 hours of work at straight time (80 hours x $20 per hour), which is $1,600. They also worked 20 hours of overtime and would be compensated at the time-and-a-half rate of $30. You would pay them $600 in overtime wages for a total biweekly earnings of $2,200.

What Is the Difference between a Wage and a Salary?

The main differences between wage and salary compensation are how pay is calculated and distributed and how overtime is calculated.

Pay Calculation

Hourly workers’ pay is calculated by multiplying their hourly rate by the number of hours they worked during the pay period. In contrast, a salaried employee has a set annual income. To calculate their pay, simply divide the annual salary by the total number of pay periods. For instance, if an employee’s annual salary is $104,000 and you pay them biweekly, they would receive 26 equal checks of $4,000.

Overtime

Most salaried workers are not eligible for overtime compensation. Whether a salaried employee works 40 hours in a week or 60, they will be paid the same amount.

Nonexempt wage workers are eligible for overtime, typically when they work past a 40-hour week. They’ll receive a time-and-a-half rate for any additional hours worked.

Wages vs. Salary: What Are the Pros and Cons?

Below, we’ve listed out the main advantages and disadvantages of wages and salaries:

Pros of Wages

• Overtime Pay: Those who are nonexempt and receive wages are eligible for overtime pay by law. Employees can usually receive time and a half for each overtime hour they work.

Cons of Wages

• Lower Earnings: Wage workers generally earn less than salaried employees. Hiring hourly workers can help employers achieve strategic organizational goals at a minimum cost.
• Limited Benefits: Compared to salaried employees, wage workers typically receive smaller benefits packages. For example, organizations may limit these employees’ vacation time to specific dates and offer healthcare plans that are restricted to specific physician networks.
• Inconsistent Work Schedules: Wage jobs may involve erratic schedules, such as shift work. These workers might find it harder to achieve a healthy work-life balance.

Pros of Salaries

• Better Pay: Salaried employees usually receive a higher income than those who receive hourly wages.
• Better Benefits: Salaried workers may receive better benefits than their hourly counterparts, including stock options and more paid time off.
• Consistent Work Schedules: Those on salary pay generally receive a consistent work schedule (e.g., Monday–Friday, 9 AM–5 PM). However, they may also be expected to work beyond these hours, especially during times of major organizational change.

Cons of Salaries

• Lack of Overtime Pay: Salaried exempt positions are not eligible for overtime pay. Therefore, some employees in demanding roles may not be fairly compensated for the number of hours they work each week.