Salary Or Hourly: How Should You Pay Your Startup Employees?

by Kate Supino


The decision of whether to pay your startup employees on a salary or hourly basis depends a lot on the type of business you have and the commodity you are selling.


Salary: The Pros and Cons

You don’t want to go into debt over your payroll, so before you pay anyone a salary, including yourself, it’s advisable to have a backlog of work or payables on the books. Because once you hire someone and commit to that person’s salary, you need to honor it, even if your income statement falls into the red.


Budgeting is easier when you pay salaries, because the amount never changes except if you give a salary increase, which would likely be once a year at the most. Calculating payroll taxes on a salaried employee is faster for the same reason.


It’s understood in the business world that you can usually get salaried employees to work on weekends and overtime without paying them extra. In fact, many states’ overtime labor laws don’t even cover salaried employees.


Watch your income soar while your payroll expenses remain flat.


It’s probably a better idea to only ask your salaried employees to work overtime occasionally on special projects that have deadlines, instead of expecting them to do it all the time. Having your salaried employees work more than 40 hours per week may make it easier for you to earn more profit for the company, depending on your business model. In return, a good boss should consider disbursing bonuses to show the overworked employees how much they are valued.


Hourly: The Pros and Cons

An hourly payroll is a better idea for start-ups, whose business income potential is yet unproven, and for businesses whose incomes are unsteady due to their nature. Also, if your hires are part-timers or do not keep regular business hours, hourly pay is the way to go.


Depending again on your business, you could have a mix of salaried and hourly employees. An example of this would be a restaurant. The front end of the business, which serves customers who walk in the door, is unsteady. The back end, which serves the business itself, is steady. That’s why most restaurant wait staff and cooks are paid hourly, while the management, who keep regular hours, is paid salary.


When your employees are paid hourly, it’s easier to make adjustments for ups and downs in your business. If business slows down, you can easily reduce that employee’s hours, lessening your payroll obligations.


Another situation in which it makes sense to pay hourly is if your business is project-based. You simply pay your employees while they are working on specific projects.


Time clocks still have their place in the modern workplace.


Employee time tracking is easier with hourly employees, because you will either have them punch in and out or fill out an electronic or physical time sheet. That way, you can better manage their productivity and reallocate their time when necessary.


Deciding how to pay your employees is a critical business move that should be well thought out. If you’re still undecided after reading this, consider looking at other similar businesses to yours and examine their methods. You might be able to either learn from their mistakes or model your own business after theirs.


Kate Supino is a freelance writer and small business owner who writes extensively about best business practices.


Photo Credits

Courtesy of Media Shower