Salaried employee pay rates and custom earning types

Use this article and the dropdowns below to understand the different ways you can pay salaried employees.

If you need to pay a one-time additional earnings paycheck, process an off-cycle payroll or bonus payroll instead.

Learn about the different employee classification options and how to change them.

Your employees can be classified in different ways based on their salary and the type of work that they do. Once you determine your employee's correct classification, make sure their status is entered correctly in your account. If their status changes, you can update this in their employee profile.

Keep in mind: Most employees are not exempt from overtime, and misclassifying your employees can result in decreased employee morale and having to pay historical wages.

If you aren't sure how your employees should be classified, the Department of Labor has published some helpful guidelines.

Customers on Gusto's Concierge and Select plan have access to HR Pros who can help navigate tricky wage/hour rules - you can upgrade your plan at any time.

Generally, there are three classifications:

Hourly/Eligible for overtime (Hourly/Non-exempt)

Earns wages based on the number of hours the employee works & earns overtime pay when applicable. This is the most common classification since most employees in the United States are required to be paid at least the federal minimum wage for all hours worked plus overtime pay at one and one-half times the regular rate of pay for all hours worked over 40 hours in a workweek.

Salary/Eligible for overtime (Salary/Non-exempt)

Earn a fixed salary if they work 40 hours or less per week. Earn overtime if they work more than 40 hours per week (regulations vary per state).

Salary/No overtime (Salary/Exempt)

Earns a fixed salary regardless of how many hours the employee works. Some employees may be exempt from overtime pay if they are employed as an executive, administrative, professional, or outside sales, as well as certain computer employees. However, job titles alone do not determine exempt status.

To be exempt from overtime, employees generally should be paid on a salary basis of at least $684 per week (equivalent to $35,568 per year for a full-year worker), and their specific job duties must meet a certain set of requirements.

Note: Salaried exempt employees are not eligible for overtime pay.

Keep in mind: The DOL permits employers to use non-discretionary bonuses and incentive payments (commission wages, sales incentives, and other rewards), as well as housing allowances for certain ministers/pastors, to satisfy up to 10 percent of the standard salary level.
- If you have an employee that will be receiving a commission or other types of incentive payments to help meet the standard salary level, check the box, "This employee will receive commissions or other types of additional compensation."
  - Commissions and other types of additional compensation can be added each time payroll is run.

Commission Only/Eligible for overtime (Commission Only/Non-exempt)

Earn wages based only on commission. Commission only employees need to make at least minimum wage for hours worked.

If you have your payroll on Autopilot®, you'll need to enter a commission before the payroll runs—they're set to a $0 salary so they won't be paid if no commission is entered.

Commission Only/No overtime (Commission/Exempt)

Earns wages based only on commission. Some employees may be exempt from overtime pay if they are employed as an executive, administrative, professional, or outside sales, as well as certain computer employees. However, job titles alone do not determine exempt status.

To be exempt from overtime, employees generally should be paid at least $684 per week (equivalent to $35,568 per year for a full-year worker), and their specific job duties must meet a certain set of requirements.
If you have your payroll on Autopilot®, you'll need to enter a commission before the payroll runs—they're set to a $0 salary so they won't be paid if no commission is entered.

S-Corp owners

Review this article to set up an employee as an owner.

Switch your employee to hourly, salaried, or commission

If your employee's classification is changing, you should update this in Gusto using the instructions below.

If you need information on how to change an employee to a contractor, rather than updating their employee-classification, check out this article on converting employees and contractors.

Change your employee's classification

Click the People section and select Team members.
Click your employee’s name.
Navigate to the Job & Pay tab.
Click Edit next to the Compensation section—if you don't see this section, you may not have the required admin permissions. Reach out to the primary admin on the account to update your permissions.
Next to Employee Type, select one of the below–check out this resource for more info on classifying your employee:
- Salary/No Overtime
- Salary/Eligible for Overtime
- Paid by the Hour.
- Commission only/No overtime
- Commission only/Eligible for overtime
Update the compensation rate or default hours per pay period if applicable.
Click Save.

Important: If you're using multiple pay schedules, there may be a gap or overlap in the employee's hours for this payroll.

If there's a gap between the employee's old and new pay schedules, run an off-cycle payroll for the in-between dates with the prorated amount.
If there's an overlap, you'll need to edit the pay on the employee's next regular payroll with the reduced prorated amount.

Default hours for salaried employees

The default hours recorded on payroll for salaried employees are calculated based on the number of company pay periods in the year and the standard of 2,080 annual working hours. See the below list of pay periods and the corresponding default hours set for salaried employees.

Every week: 40 hours
- 52 pay periods
Every other week: 80 hours
- 26 pay periods
Twice a month: 86.67 hours
- 24 pay periods
Monthly: 173.33 hours
- 12 pay periods

You can also edit these hours in payroll if they need to be adjusted for the pay period.

Example: There is a total of 2,080 working hours per year. Joe is paid every other week, for a total of 26 pay periods in the year. 2,080 total annual hours divided by 26 pay periods equals 80 hours per pay period.

If you have an employee who works more or less than the default 40 hours per week, and you want their actual hours worked to be reflected on the paystub, you'll need to add them as an hourly employee and add their specific default hours.

Update hours for salaried employees

If you need to edit the default hours for salaried employees in payroll, you can do so from your admin Gusto account if you have the required permissions.

At this time, there's not a way to adjust a salaried employee's hours without also adjusting the employee's wages.

Click the Payroll section and select Run payroll.
Click Run Regular Payroll.
Next to the employee, click the default hours.
- Adjusting the hours will impact the employee's wages.
Enter the updated amount.
Finish running payroll.

Add custom earning types

Rather than limit yourself to standard earning types—like bonus, tips, and commission—you can create a custom earning type and name it whatever you like.

Example: You might use a custom earning type for a signing bonus or severance pay.

These will be treated as supplemental wages that are separate from regular wages, but will be taxed as regular wages.

You can create as many custom earning types as you'd like and they'll be available for all employees on all payroll runs.

Add a custom earning type

Sign in to your Gusto account.
Go to the Payroll section and select Payroll settings.
Under "Custom earnings," click Add custom earning type.
Name this wage whatever you'd like. This title will appear on employee pay stubs and in your reports.
Click Save.

Now when you enter wages in a regular, off-cycle, or bonus payroll, you'll see this custom earning type in the “Additional Earnings” column.

Note: If other earning types have been used in the past, the new custom earning type may appear within “Other Earnings” in the dropdown elections.

FAQs

Q: Can I edit the name of an earning type or disable an earning type after it's been created?

A: Yes. Under the "Actions" column next to the custom earning name, click the three-dot menu and select edit.

Q: If I disable an earning type will it still appear on employee paystubs and in reports?

A: Yes.

Add a recurring payment to payroll

If your employee regularly receives additional compensation, you can add this to their profile so you don't have to enter it each time you run payroll.

Note: recurring payments can't be set up for contractor payments.

Click the People section and select Team members.
Click on the name of the employee receiving the recurring payment.
Scroll to the Compensation headline.
If your employee is hourly, click Add a job or earning type.
- This earning type is a flat amount and can't be hourly.
If your employee is salaried, click Add earning type.
Select the type of recurring payment:
- Bonus
- Commission
- Paycheck tips
- Cash tips
- Additional earnings
Enter the default amount they earn per pay period.
Click Save.

This amount will now be added to each future regular payroll.

Schedule a compensation change

Click the People section and select Team members.
Click on your employee's name.
Under Compensation, click edit.
Enter in their new salary or hourly rate.
Select when their new compensation will be effective.
Select a specific pay period from the drop-down menu. You can select from any future payrolls you haven't yet processed, but can't select a date in the middle of the current pay period. The first day of the pay period is the day the change will take effect.
If you select a specific date, you can choose the date from the calendar.
- Note: Compensation changes that take effect on a specific date in the middle of a pay period will require manual calculation. To account for this change, you'll need to calculate the mid-period increase and add it manually.
- The new compensation amount will reflect fully in the following pay period where the employee receives funds.
You can enter a reason for the update if necessary, like "Promotion."
Click Save.

Cancel a pending change

You can cancel a scheduled change up until you run a payroll with the new compensation.

Click the People section and select Team members.
Click on the employee's name.
Under Compensation, click Cancel Change.
Follow the steps above to schedule a new change if needed.

Add a historical change

Click the People section and select Team members.
Click on the employee's name.
Under Compensation, click View Compensation History.
Click Add Historical Entry.
Enter the required information.
Click Save.

Prorate/calculate an employee's salary for a mid-pay period change

If your employee receives a raise in the middle of a pay period, you must manually calculate the extra amount to add to the payroll to accommodate the salary increase.

Please consult a CPA with any questions about the method outlined below—several methods may be acceptable depending on your specific situation.

In the example calculation below, Aly is making $50,000 a year when she gets a raise to $55,000 a year. She's paid every other week on Friday. Her raise is effective in the middle of the pay period, on a non-payday Friday.

Divide their annual salary by the number of pay periods in a year	Aly makes $50,000 a year and is paid every other week	$50,000/26 = $1,923.08
Divide the amount they are paid in a period by the number of days in a period to calculate their old daily rate.	Aly makes $1923.08 for 14 day worked	$1923.08/14 = $137.36
Repeat the steps above to find your employee's new daily rate.	Aly now makes $55,000 a year. Her new daily rate is $151.10.	$55,000/26 = $2,115.38. $2115.38/14 = $151.10
Add the number of days at the old rate with the number of days at the new rate to get the total salary for the pay period.	Aly worked 7 days at $137.36 a day. She worked 7 days at $151.10 a day. Her total salary for the pay period is $2,019.22.	$137.36 x 7 = $961.52 $151.10 x 7 = $1,057.70 $961.52 + $1,057.70 = $2,019.22

What's the difference between net pay and gross pay?

When it comes to payroll, there are a lot of ways to talk about the wages your employees get paid. Two important terms to understand are net pay and gross pay.

Gross pay is the amount of money your employees receive before any taxes and deductions are taken out. For example, when you tell an employee, “I’ll pay you $50,000 a year,” it means you will pay them $50,000 in gross wages.

Net pay is the amount of money your employees take home after all deductions have been taken out. This is the money they have in their pocket on payday.