Annual Compensation vs. Annual Salary

Annual Compensation vs. Annual Wage: An Overview

Annual compensation and annual wage might sound like the identical factor however, in truth, they symbolize two very completely different measures of your earnings. Understanding what every of those phrases means is vital for figuring out how a lot cash you earn on a yearly foundation. As well as, it’s important to know your annual compensation if you’re saving for retirement in a tax-advantaged plan.

Annual Compensation

Annual compensation, within the easiest phrases, is the mixture of your base wage and the worth of any monetary advantages your employer gives. This consists of:

Most often, all of the compensation you obtain is taken into account taxable earnings by the Inner Income Service (IRS). There are some exceptions, nevertheless. For instance, if you’re a authorities worker working overseas and also you obtain a cost-of-living allowance, that earnings would usually be tax-free. 

Annual Wage

Your annual wage is the amount of cash your employer pays you over the course of a yr in alternate for the work you carry out. The wage you obtain is predicated on a 40-hour work week, though (if you’re on wage) your wages aren’t decided by the variety of hours you’re employed. 

The federal authorities establishes base wage tips for sure workers together with these working in government, skilled, and administrative positions. Beneath outdated U.S. Division of Labor guidelines, the minimal base wage for these workers was $455 per week. Starting December 1, 2016, the bottom wage fee was set to extend to $913 per week, however in November 2016 a courtroom case in Texas put that ruling on maintain.

On September 24, 2019, the Division of Labor revised the quantity to $684 per week.

The aim behind the rule is to make sure that salaried staff who work greater than 40 hours per week are being adequately paid for his or her time. Hourly workers, by comparability, would obtain an additional time wage that’s larger than their regular hourly fee for any hours they work past the preliminary 40-hour week. This wage needs to be at the least 1.5 instances their common hourly fee.

To determine how a lot your wage breaks right down to on an hourly foundation, you divide the quantity you obtain over a selected pay interval by the variety of hours you’re employed. For instance, suppose you earn a wage of $72,000 yearly and you’re employed a 40-hour week all yr. Earlier than taxes, your wage breaks right down to an hourly wage of $34.62. 

Particular Issues

One of many causes it’s so vital to know your annual compensation is that sure retirement plans base your contribution restrict on how a lot compensation you earn.

For instance, think about a state of affairs the place you might be enrolled in your employer’s 401(okay) plan, which gives an identical contribution of fifty% of elective wage deferrals, as much as 5% of your annual compensation.

For 2021, the IRS caps the quantity of annual compensation employers can use to find out matching contribution quantities at $290,000 (rising to $305,000 in 2022). Assume that your annual compensation totals $360,000 and also you contribute the complete $19,500 allowed for 2021 (the quantity rises to $20,500 for 2022). Your employer would solely be capable of provide a match equal to half of 5% of $290,000, which involves $7,250.

Figuring out how a lot your employer is ready to present for the match is a should if you find yourself mapping out your retirement technique. The extra money you will get out of your employer, the sooner your investments will develop over time.

It’s simple to confuse annual wage with annual compensation, however figuring out the distinction may help you map out a clearer monetary plan. When you perceive the full worth of your employment, it’s simpler to find out how a lot you possibly can defer into your employer’s retirement plan, what you’ll owe in taxes for the yr, and the way a lot you’ll have left to cowl your bills. Not solely that, however understanding the main points of wage and compensation can provide the edge when negotiating your pay for a brand new job or asking your present employer for a increase.