If I ask you to tell me the difference between annual compensation and annual salary, I am sure not many will be able to answer. Well, it is alright to not know the answer as we’ve got you covered. Stick till the end of this blog to answer it the next time if someone asks you the same question. You can thank us later!
Annual compensation and annual salary may sound the same but it has completely different meanings. They represent two very different measures of a person’s earnings. Hence, it is very important for an individual to know and understand both the terminologies. Why? To examine and figure out how much total money you earned on a yearly basis. Furthermore, it is also vital to get a clear picture of annual compensation, especially if a person is saving for retirement in a tax-advantaged plan.
So, let’s dig deeper and know more about annual compensation and annual salary!
Annual Salary
The very first thing that comes to our mind when asked about earnings is, of course, our annual wages or salary. For instance, if an individual earns $45,000 in a year, then he or she will think of it as his or her annual wages or salary. But a person’s wages or salary don’t consist of all compensation, particularly if he or she works full time or for a well-established firm. There are chances that their organization provides numerous benefits including health or life insurance, a retirement investment plan, and much more.
In simpler words, the annual salary is the total sum of money your employer pays you in a year for your service to his or her company. This salary is based on a 40-hour week.
The federal government has established certain base salary guidelines for some employees such as people working in executive, professional, and administrative positions. As per the U.S. Department of Labor rules, the minimum base salary for these workers was $455 in a week.
In December 2016, the base salary rate was decided to be increased to $913 in a week, however, in November 2016 a court case in Texas put that request on hold.
In September 2019, the Department of Labor changed the amount to $684 in a week.
The main aim of this rule was to make sure that every salaried employee who works over 40 hours per week should be adequately paid for his or her time. And talking about the hourly employees, they were supposed to receive an overtime wage higher than their normal hourly rate. That means, they should be paid if they worked more than 40-hour in a week. Also, this wage has to be a minimum of 1.5 times their regular hourly rate.
Now, you will be thinking about how to break down your salary/wages to an hourly basis? It is not at all complicated! You just have to divide your total salary by your total work hours. For instance, if a person earns a salary of $72,000 a year and he or she works a 40-hour every week (all year). So, his or her salary breaks down to an hourly salary of $34.62, i.e. before any tax.
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Annual Compensation
So, we all know that every benefit is included in our total annual compensation. When a company contributes a health insurance plan or makes contributions to a retirement plan on behalf of an employee, then that is considered a part of his or her annual compensation as well.
Most companies today also provide tuition reimbursement or subsidized and even on-site daycare. An employee’s costs to participate in such programs are also added in his or her annual compensation.
In simpler words, annual compensation is a combination of an individuals’ base salary and the value of any financial benefits his or her employer provides.
These benefits mainly include:
- Annual bonuses or commissions
- Health insurance
- Dental insurance
- Life insurance
- Disability insurance
- Paid vacations
- Retirement plans
- Profit-sharing plans
- Sick leave
- Fringe benefit
Mostly, every compensation received by a person is considered taxable income by the Internal Revenue Service (IRS). Although there are certain exceptions, too. For instance, if a person is a government employee who is working abroad as well as he or she receives a cost-of-living allowance, then the income will be tax-free.
So, we hope now you understand annual compensation, annual salary and the difference between them.