Does anyone have good knowledge of how this works? I've been investigating this but it is hard to figure out. How is it that taking your salary and dividing it up by hours worked for a year is not equal to W2 hourly rate? Do you pay less taxes or what?

Taxes are figured exactly the same.

Taxes paid are based on the total pay over the year. The company will withhold some money and send it to the government based on the exemptions you listed on your W4 form when you were hired. Talk with your company's payroll or HR department if you want that number adjusted. The amount withheld is figured in to your final annual income tax assessment. If you overpaid you get a check back for the difference, if you underpaid you need to pay the difference. Either way the tax is the same.



The only major difference between salary and hourly is under US law is the overtime exemption.

Under a salary position you get paid the same no matter how many hours you work. If you spend 30 hours one week it pays exactly the same as another week with 60 working hours. The professional work year in the US is considered to be 2000 hours.

Under an hourly position you get paid based on your hours worked. Your employment agreements specify the wage to be paid before overtime (generally 40 hours), and a wage to be paid for the 41st hour and beyond. Frequently it is 1.5x the regular rate, but that is not set by law.


The overtime exemption is countered by the fact that many employers offer additional benefits to salaried employees. Vacation time and sick days are the most common difference (hourly employees generally don't receive either), although each employer can set their own policy.

Alright, I just see so many posts that are like. Salary = 60,000

60K/52wks/40hrs = 28.00/hr

And then people say "on W2" I would need to make 40.00/hr. What are they factoring in? Why do they need to make more on W2? I can see the argument that well if you get vacation time, your working less weeks and therefore making a bit more per week.

Quote: Original post by dpadam450
Alright, I just see so many posts that are like. Salary = 60,000

60K/52wks/40hrs = 28.00/hr

And then people say "on W2" I would need to make 40.00/hr. What are they factoring in? Why do they need to make more on W2? I can see the argument that well if you get vacation time, your working less weeks and therefore making a bit more per week.

That's actually 2080 hours. There are holidays and other 'off' times, so the generally used calculation is 2000. A 60,000 salary would be $30/hr.

There is very little difference between hourly and salary pay, certainly not a 30% difference.


I'm guessing you are confusing hourly work with contract employees, frequently called "1099-ers". Unlike regular employees, contract employees do not earn any benefits from the company.

A 1099 contractor is not an employee of the business. They are considered a separate entity, and they are responsible for their own taxes and benefits, as well as their own equipment and other costs. Think of more like somebody you hire for repair work on your home, or property care.

For a contractor, paying for your own benefits can be expensive, which is the biggest part of the pay difference. Contract workers also have an inherently less secure job and they will spend both time and money in finding and retaining customers; that accounts for most of the rest.

Under the current tax system, an employer pays a portion of their employee's income tax. The employee never sees this, so they generally don't know about it. That is currently 7.65% of the employees wage, plus any unemployment insurance taxes, and any state taxes. Vacation and sick days may account for another 8-10%, holidays another 5%, and health benefits another 5-10%. That's roughly 30% more money that the employer pays out as 'hidden' wages. That would bring $30/hr up to $40/hr, as you mentioned.

A contract worker will need to file taxes as a self employed worker, or incorporate as a business in their state and file as a business. Either way they will be required to pay those additional taxes that the employer would have paid.

Yup 1099 I guess is what I meant. Thanks for clearing that up.