There are many payroll providers and HR software options that employers can use to ensure that the payroll numbers are correct. Even with these systems in place, having a basic understanding of concepts and terms is useful. One of the most common terms you will hear is “annualized salary”. What is it?
An annualized salary is the term used for a pre-set amount of gross pay per month throughout the 12 months of the year for an employee. It totals the estimated yearly earnings.
What is the use of calculating an annualized salary?
Computing an annualized salary is useful in budget planning. It is especially useful for planning an allotted budget for full-time employees who are not expected to work for a full year, or even for part-time and hourly workers.
For example, if your company is planning to hire a new employee in September, you will need to compute an annualized salary for budget purposes. This will help you in figuring out how much the employee will earn within a specific budget and a particular time frame.
Aside from this, having an annualized salary payment method allows employees to receive a fixed and regular paycheck of a predetermined salary throughout the year. For example, a school employee who works for only ten months per year will still receive a paycheck during the summer months if they are on an annualized salary.
Additionally, it will also be easier to distribute or spread out the cost of taxes, insurance, and other benefits with payroll deductions.
Is there a difference between an Annualized Salary and an Annual Salary?
Yes, there is a difference between an annualized salary and an annual salary. These two terms represent two different measures of an employee’s earnings. At first glance, they may seem the same. To explain a bit further, let’s break it down.
An annual salary is the amount of money that an employer pays over a year for an employee’s work. It’s the total yearly income. This is typically the money an employee receives based on a 40-hour workweek. However, for some employees, they are paid a fixed amount regardless of how many hours they work each week. This will depend on your contract with your employer.
An annualized salary, on the other hand, is the figure that is paid to employees based on how much time they spent on the job and the wage type.
What is an Annualized Compensation?
An annualized compensation is the combination of an employee’s base pay plus the value of any other financial benefits that the employer provides. Examples of such benefits are:
Commissions and bonuses
Disability and life insurance
Tuition and child care assistance
Why is it important to know about your annualized compensation?
If you are an employee and you get your paycheck regularly, understanding your annualized compensation may seem of little use. But like in a lot of things, it’s essential to see the bigger picture. So why is it useful to know about annualized compensation?
In paying taxes, the IRS considers your annualized compensation as taxable income. Also, there are retirement plans that base contribution limits on compensation and not the base salary. Lastly, understanding your annualized compensation is beneficial in knowing the value of your employment in exchange for your skills and expertise.
How is annualized salary calculated?
Now, we go to the numbers. Let’s take a look at these examples:
Elizabeth worked for 5 months and earned $30,000 for it. What is her annualized salary?
Divide $30,000 by the number of months she worked.
Now that we know the monthly income, multiply it by 12 months. You will get Elizabeth’s annualized salary.
$6,000 × 12=$72,000
Levi works 10 hours per week for $12 per hour. There is no unpaid vacation time or sick leave. What is Levi’s annualized salary?
Find out how much Levi earns per week. Multiply the rate by hours worked per week.
$12 × 10=$120
Since we know that there are 52 weeks in a year and Levi did not have any vacation time or sick leave, multiply the weekly rate by 52. You will get Levi’s annualized salary.
$120 × 52=$6,240
Mary works 20 hours per week for $12 per hour. She has 2 weeks of vacation time. What is Mary’s annualized salary?
Find out how much Mary earns per week. Multiply the rate by hours worked per week.
$12 × 20=$240
We know that there are 52 weeks in a year. We will subtract 2 weeks from this to account for the 2 weeks of vacation time. Multiply Mary’s weekly rate by 50 and you will get her annualized salary.
$240 × 50=$12,000
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