Annualized salary is an estimate of how much pay an employee will earn over the course of a year if they were to work the full year. It is based on their earnings during a shorter reference period—such as one week or one month.
An annualized salary is often used for budgeting for hourly or part-time employees. Annualized salary can also be used to calculate monthly pay for employees who do not work a full year but who want to be paid consistently throughout the year.
Annualized Salary vs. Annual Salary
Annual salary and annualized salary are slightly different. An annual salary is a guaranteed amount that will be paid to a salaried employee who works a full year. Their hours are typically pre-agreed in their contract and don’t vary month-on-month—salaried employees don’t tend to receive overtime pay either.
An annualized salary is an estimate of full-year pay for an hourly or part-time employee. An annualized salary reflects how much an employee is likely to make if they work consistently throughout the year.
Annualized compensation
Note that annualized salary is different from annualized compensation. Annualized salary only includes an employee’s base pay, while annualized compensation includes base pay and all of an employee’s other benefits.
Annualized compensation may include health insurance, paid time off, a retirement plan, subsidized child care, and more.
When is Annualized Salary Used?
Annualized salaries are typically used for hourly employees, part-time employees, or employees who do not work a full year. The latter category may include employees who start or leave a salaried position partway through a year. Annualized salary is also used for employees like teachers, who often work 10 months per year.
Why Use Annualized Salary?
Annualized salaries can be used for several different purposes.
First, it can be very helpful for budgeting. Say your company hires an hourly employee who makes $4,250 during a month—including overtime pay. You can multiply this monthly pay by 12 to calculate an annualized salary of $51,000. This is the amount that the employee would earn in a year if they work the same amount each month.
Annualized salary can also be useful for determining monthly pay for part-time employees like teachers. Say a teacher works 10 months per year and has an annualized salary of $75,000. That equates to a monthly salary of $6,250 per month, which can be paid each month of the year—including during the two summer months when the teacher is not working. Paying a consistent salary is often helpful for employees and spreads the costs of taxes, insurance, and other employee benefits over the full year.
How to Calculate Annualized Salary
To calculate an annualized salary, you must first choose a reference period—such as an hour or a month. Determine how many reference periods there are in a year, then multiply that by the amount an employee earned during that reference period.
For example, say your reference period is one month. There are 12 months in a year, so you would multiply an employee’s monthly salary by 12 to calculate their annualized salary.
For hourly employees, you might use a reference period of one hour. There are 2,080 hours in the typical work year. If an employee makes $15 per hour, their annualized salary will be $31,200. Note that this does not account for overtime pay, and their actual full-year pay may be more or less than this annualized salary depending on how much the employee works.
Conclusion
Annualized salary estimates how much an employee would make if they worked a full year based on their earnings during a reference period. Annualized salary is often used to properly budget for hourly or part-time employees. It can also determine the monthly pay for employees who do not work a full year.
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