What is annualized salary?

An annualized salary is the amount of money an employee would earn if their current compensation rate were applied for a whole year. As a concept, it is used to standardize pay rates for employees who work less than a full year, or whose earnings vary throughout the year. This helps employers compare salaries, budget payroll expenses, and communicate compensation more clearly.

How to calculate annualized salaries

Annualized salaries can be calculated as follows:

For hourly employees:

Multiply their hourly wage by the number of hours they work per week, and then multiply that figure by the number of weeks they work in a year.

Annualized salary = Hourly rate × Hours per week × Weeks per year

For example, if an employee:

Earns $20 per hour;
works 40 hours per week; and
works 50 weeks a year,

…their annualized salary would be:

$20 × 40 × 50 = $40,000

For part-time or seasonal employees:

Annualize their salary by determining what they would earn if they worked full-time or year-round.

For example, if a part-time employee earns $15,000 for 6 months of work, their annualized salary would be:

$15,000 × 2 = $30,000

For salaried employees:

Multiply their current salary rate by the fraction of the year they are expected to work.

For example, if an employee with a monthly salary of $4,000 is hired in July, their annualized salary would be:

$4,000 × 12 = $48,000

Why are annualized salaries helpful?

As mentioned, annualized salaries are a highly useful concept for HR teams. Specifically, they help you in the following areas:

Budgeting and financial planning. Annualized salaries help employers accurately project payroll expenses for budgeting and financial planning purposes.
Salary comparisons. Standardizing salaries on an annual basis allows you to more easily compare compensation across different employees, roles, or departments.
Employee contracts and communication. Providing an annualized salary figure in employment contracts and offer letters helps communicate the total compensation package more clearly to your employees.

From your employees’ point of view, this also helps them understand their compensation in a broader context, reducing confusion, improving satisfaction, and promoting fairness and equity across the business.

Best practices for annualized salaries

When using annualized salaries, always consider the following:

Variable compensation. Don’t forget to account for additional forms of compensation such as bonuses, commissions, and benefits when generating a comprehensive view of total earnings.

Legal and compliance. Ensure that the annualized salary calculations comply with local labor laws and regulations, particularly concerning minimum wage and overtime rules.

Annualized Salary