Most employees are either paid based on the number of hours they worked or they receive a pre-determined salary. While this might seem like a minor distinction, the choice you make can have a significant impact on the complexity of your payroll calculations and your total expenses. Below are a few factors to consider before deciding which compensation package to offer your employees.

Hourly Wages

For many small business owners, hourly wages are an attractive option because you only pay for the time the employees spent at their job. This also gives you the flexibility to adjust your payroll expenses on a weekly basis, cutting costs during slow periods and adding workers during the busiest times. Hourly wages are especially common in industries with fluctuating workloads, such as food service or hospitality.

However, tracking those hours, along with the required breaks and mealtimes, is time-consuming and labor-intensive, especially for small business owners who handle payroll themselves. Federal law also requires employers to pay overtime for any hours that non-exempt employees work over 40 hours per week, making calculations even more complicated.

Paying a Salary

Offering workers a salary simplifies the payroll process and allows you to accurately predict your expenses every period. Business owners don’t have to track hours or meal times for salaried employees and paid time off can accrue on a daily or weekly basis. Most salaried employees are exempt from overtime rules, further simplifying the accounting process.

However, paying workers a salary does have some disadvantages. For instance, you may still be required to track hours and pay overtime to non-exempt workers, essentially eliminating most of the benefits of offering a salary in the first place. It also obligates you to pay the agreed rate even if there is not a full day’s work available for them. For instance, if a power outage forces your office to close, you’ll still be obliged to pay salaried workers even after they’ve been sent home.
 

For over 20 years, Donna Sellers CPA has provided business owners throughout Terry County, TX, with a wide range of accounting and payroll services, allowing them to concentrate on what they do best. From deciding on compensation structures to calculating hours, their accounting team will handle all the details so you can focus on growing your business. Visit their website for more on their capabilities. Call (806) 637-8556 to make an appointment.