Glossary of Human Resources Management and Employee Benefit Terms
An annualized salary is a pre-set amount of gross pay per month paid to an employee throughout the 12 months of the year, totaling an estimated yearly earning.
An annualized salary is often used to budget for:
Full-time employees who won’t be working a full year (for example, school employees who don’t work over the summer, or employees who retire before the end of the year)
An example of an annualized salary is when a school teacher works in a 10-month position during the year, but gets paid biweekly even over the summer. This payment method ensures a regular paycheck is received throughout the year and also facilitates the equal distributions/deductions of taxes, insurance, and/or other employment benefits.
An annual salary is the guaranteed amount an employee is paid over the course of a year. Annual salary is based on a 40-hour work week, unless the employee is paid overtime or is “on salary.”
Annual salary differs from annualized salary because the annual salary is an employee’s total yearly income (should an entire year be worked), but the annualized salary is based on the actual amount of time spent on the job.
Annualized compensation is the combination of an employee’s annualized salary plus any financial benefits provided during the working period, such as:
Commissions and bonuses
Health and dental insurance
Disability and life insurance
Sick leave and paid time off
Tuition and childcare assistance, etc.
If an employee’s salary is annualized, it means that an employee takes home a fixed and equal amount of a predetermined annual salary each paycheck. This method ensures a regularly distributed paycheck and helps to facilitate the paying of taxes, insurance premiums, and employment benefits.
Here are a few reasons why it matters if an employee is on annualized salary or annualized compensation:
Tax Purposes: Almost always, an employee’s annualized compensation is considered by the IRS to be taxable income which determines how much taxes are to be paid.
Employer/Employee-Matched Contributions: Certain retirement plans’ contribution limits are based on compensation, not salary.
Employee Valuation: It can help an employer know if the employee is being fairly compensated in pay and benefits in return for skills, capabilities, and experience.
Annualized income is calculated by dividing 12 (number of months in a year) by the number of months worked. The resulting number is then multiplied by the actual income.
For example, let’s say an employee worked from Jan 1 to May 31 (5 months) and earned $30,000 in income during that time. Dividing 12 months by 5 months equals 2.4, which is then multiplied by the $30,000 to equal $72,000 in annualized income.
Here’s another example: A subcontractor earned $600 last week. If that subcontractor earns the same amount every week for a year, he will have earned an annualized income of $30,000 ($600 multiplied by 50 working weeks in a year).
To convert a part-time wage to an annualized salary, follow these three steps:
Determine how many part-time hours are worked per year. If the position requires 20 hours per week, multiply that by 50 (the commonly used number for weeks per year accounting for 2 weeks of vacation time) for a total of 1,000 hours per year.
Multiply 1,000 hours by the hourly salary. So if the employee is paid $12 per hour, the annualized salary is 1000 x 12 = $12,000.
Adjust the annualized salary for local, state, or federal tax incentives.
Since income is annualized primarily for estimating taxes and investments, it’s important to know how to do it correctly. If you are unsure of your calculations or want a shortcut, opt to use an annualizing calculator.
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