Base salary is the fixed amount of pay before deductions and other earnings are applied to an employee’s paycheck. For salaried exempt employees, the annual base salary is distributed equally across all pay periods throughout the year. It is one part of a total compensation package that is agreed to when a job offer is accepted. The term base pay is a broader term that includes hourly workers, whose pay varies depending on hours worked.
Additions and Deductions to Base Salary
Additions to base salary include commissions, tips, bonuses, incentive pay, stock options, profit-sharing distributions, special assignment pay and paid time off (PTO). “Paid time off hours are not considered part of an employee’s salary under the Fair Labor Standards Act (FLSA), according to a federal appeals court,” reports Saxton and Stump. For hourly workers, overtime pay is an addition to base pay.
Deductions from base salary include benefits, federal, state and local income taxes, Social Security and Medicare taxes (FICA), and wage garnishments. Benefit deductions from paychecks may include premiums for health, dental, vision, disability, and life insurance as well as contributions to health savings accounts (HSAs), flexible spending accounts (FSAs), and retirement plans.
Differences Between Common Pay Terminology
Base salary, also called basic salary, serves as the foundation for pay discussions, from internal equity to calculating percentages for retirement plan contributions and bonuses. It is the salary before any additions or deductions.
Gross pay, also called gross wages or gross income, is base salary plus all additional earnings before any deductions are subtracted.
Net pay is the amount of take-home pay after all mandatory and voluntary deductions have been subtracted from gross pay. It is the actual amount deposited in a bank account for each paycheck.
Employees and employers can use a gross-to-net calculator to estimate take-home pay specific to each state. Or, a gross-up calculator can be used to estimate pay before additions and deductions.
Total compensation is the total value of everything an employee receives, including direct pay and indirect pay. It includes base salary, the monetary value of benefits, and all other additions, such as bonuses and commissions. A company can generate a total compensation statement and share it with employees. When employees clearly understand the value of their benefits and perks, it can be a powerful recruitment and retention tool.
Base Salary Vs. Annual Salary
Annual salary is different from base salary. Annual salary includes all pay added on top of the base salary throughout the year. This means totaling up all the additions to your paycheck throughout the year, from bonuses to commissions.
How Is Base Salary Calculated?
To calculate base salary, simply divide the annual base salary by the number of paychecks per year. The number of paychecks per year varies from company to company, depending on the type of pay cycle used. Semi-monthly pay has 24 pay periods per year, while biweekly pay has 26 pay periods. For example, an employee with an annual base salary of $96,000 who receives 24 paychecks per year will have a base salary in each paycheck of $4,000.
Can Base Salary Change?
Base salary can increase when an employee receives a raise, promotion, cost-of-living adjustment, or transfer to a different location. A reduction in base salary can occur if an employee is demoted or changes positions. Employers may also cut pay by following the laws.
Elements of a Compensation Package
A total compensation package includes direct compensation (base salary, bonuses and commissions) plus indirect compensation from benefits and other perks. To attract top talent, employers need to offer competitive compensation packages.
Base salary: The fixed amount of pay before deductions and additional earnings are applied to a paycheck is called base salary.
Bonuses: Employees can receive extra pay as bonuses for many reasons, including performance, holidays, company milestones, or as an incentive to accept a job offer (signing bonus).
Commissions: When extra pay is received based on sales performance or as an incentive for reaching goals, it is called commission.
Rewards: Employees can receive monetary compensation or other gifts as a reward or to celebrate a milestone.
Overtime: When hourly employees work more than 40 hours per week, they receive overtime pay of at least one and one-half times their regular rate.
Insurance: Health, dental, vision, disability, life, accident, hospital indemnity, critical illness, and long-term care insurance may be offered by the employer.
Retirement plans: The two main types of retirement plans are defined benefit plans (pensions) and defined contribution plans such as 401(k). In defined contribution plans, the employer may provide a match for employee contributions. Pension plans have a promised set amount that an employee will receive monthly when they reach a certain age.
Paid time off: Employees highly value paid time off that they can use for holidays, vacations, personal days, sick leave, bereavement and other needs.
Stock options and equity: Employers may give employees a stake in the company through stock options or equity.
Tuition reimbursement: The cost for employees to further their education may be partially reimbursed by employers.
Childcare assistance: From on-site daycare centers to discounts and subsidies, employers are prioritizing offering childcare benefits.
Employee assistance programs (EAPs): Whether employees need referrals, assessments, or counseling, EAPs help manage mental health, stress and wellness.
HSAs and FSAs: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allow employees to set aside pre-tax money for health expenses.
Other perks: Flexible hours, company vehicles, laptops, snacks, meals, retreats, commuter expenses, relocation expenses, travel expenses, employee discounts and gym memberships are examples of other perks.
Employees, especially new hires, frequently have questions about their paychecks. When employers allocate time to explain the steps used to determine pay and the definitions for common pay terminology, employees will have the clarity they need.
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