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 (e.g., school employees who don’t work over the summer or employees who retire before the end of the year)
For example, a school teacher works a 10-month position during the year but gets paid biweekly even over the summer. This annualized salary payment method ensures that the teacher receives a regular paycheck throughout the year and also makes it easier to equally spread out the cost of taxes, insurance, and other employment benefits resulting in payroll deductions or distributions.
Annual salary differs from annualized salary because the annual salary is an employee’s total yearly income. Salaried employees receive their pay regardless of how many hours they’ve worked, meaning that they usually don’t receive overtime and they don’t have to clock in.
An annualized salary is basically an estimated annual salary based on the actual time spent on the job and the wage type.
Annualized compensation combines an employee’s annualized salary with 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 child care assistance
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.
Here’s how to calculate annualized salary:
Divide the earned income by the number of months worked to figure out the monthly income.
Multiply the monthly income by 12 (the number of months in a year) to get the annualized salary.
For example: Let’s say an employee worked from January 1 to May 31, which is 5 months, and earned 30,000 dollars in income during that time. Divide 30,000 dollars by 5 months to get the monthly income of 6,000 dollars, and then multiply that by 12 months to get the annualized salary, which would be 72,000 dollars.To calculate an annualized salary from an hourly rate:
Calculate the number of hours worked per year. Multiply the number of hours worked per week by 50. While there are 52 weeks in a year, this accounts for 2 weeks of vacation time.
Multiply total hours by the hourly salary.
For example, if an employee working 20 hours per week is paid 12 dollars per hour, the annualized salary is 20 hours/week x 50 weeks/year = 1000 hours/year x 12 dollars/hour = 12,000 dollars per year.
Calculating annualized salary from weekly pay would be similar to calculating it from hourly pay, as it would also rely on 50 working weeks. For example, a subcontractor earned 600 dollars last week. His annualized income would be 30,000 dollars or 600 dollars multiplied by 50 working weeks in a year.
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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