When companies employ staff who won't work for an entire year, such as teachers and seasonal staff, it can be difficult to know what their earnings will be over the course of a year.
This is where annualized salary comes in.
What is an annualized salary?
An annualized salary is the estimated yearly earnings of an employee based on the actual time they work. Calculating annualized salaries is especially useful for employees who don't work full-time hours and for those who only work for part of the year.
Schools can use annualized salaries to calculate how much money to pay teachers each month over the course of the year, even though teachers typically only work 10 months out of the year.
What is the difference between annual salary and annualized salary?
The main difference between annual salary and annualized salary is that annual salary is a set figure, no matter how long the employee actually works. An annualized salary accounts for the amount of time an employee works. Annualized salaries can give both employers and employees a truer representation of an employee's earnings over the course of a year.
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What are the benefits of an annualized salary?
The main benefits of annualizing salaries are:
It provides employers with a more accurate figure to work with when budgeting and planning for the year ahead.
It makes it easier to compare the earnings of employees who work different hours or weeks.
It can account for different hourly rates, other forms of compensation, and any unpaid vacation time.
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How is an annualized salary calculated?
Annualized salary is calculated differently for employees paid by the hour, and those who are salaried:
How to calculate annualized salary for hourly workers
To calculate the annualized salary of an hourly worker, multiply the employee's hourly wage by the number of hours they are expected to work each week. Then multiply that figure by the number of weeks in a year.
Formula: Annualized Salary = (Hourly Wage x Hours per Week) x 52
Example: Employee A works for 20 hours per week for $15.
($15 x 20) x 52 = $15,600
Employee A's annualized salary is $15,600.
How to calculate annualized salary for salaried workers
To calculate the annualized salary of a salaried worker, divide the employee's total earnings in a year by the number of months they are expected to work. Then multiply that figure by the number of months in a year.
Formula: Annualized Salary = (earnings ÷ number of months worked) x 12
Example: Employee B works for 10 months and earned $50,000.
($50,000 ÷ 10) x 12 = $60,000
Employee B's annualized salary is $60,000.
*To account for unpaid vacation time or sick leave, subtract the amount of time from the number of weeks or months.
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