Salary or hourly? Here’s the best way to pay employees

Wondering about the best way to pay employees? Well, then: congrats! Hiring your first employee or expanding your team is a big deal in the world of small business.

Read on to learn more about the different types of employees. We’ll break down the best way to pay employees, how to use time tracking to make things easier, and why you need a solid payroll system to make it all come together. 

What’s an hourly employee?

An hourly employee is a person who is paid based on the number of hours they work.

Hourly employees can be found in any industry. Most commonly, hourly employees work in food services or restaurants, retail environments, and hospitality, just to name a few. Because they’re not salaried employees, hourly workers are typically eligible for overtime pay. This is sometimes compensated at higher rates than the hours paid in the standard workweek, depending on your jurisdiction and its labor laws. 

What’s a salaried employee?

A salaried employee is a worker who receives fixed compensation on a regular basis. A salaried employee will typically have a predetermined annual salary amount, and aren’t usually paid for things like overtime.

Salaried employees receive their pay monthly, bi-weekly, or semi-monthly. Essentially, it’s their annual salary divided into regular pay periods. This gives them the same amount regardless of how many hours they worked with that pay period.

You can typically find salaried employees working in environments like offices, agencies, or in managerial or administrative roles. In a small business, this could be an assistant manager, store owner, or someone who oversees functions across multiple store locations, like an HR leader or inventory manager.

Hourly versus salary employees: what’s the difference?

If you’re looking for the best way to pay employees, whether they’re hourly or salaried, it’s best to start by looking at the differences. There are pros and cons that come with each option. Once you’re well versed in the ins-and-outs of both, you’ll be able to make the right decision for your small business and the people who work there.  

The pros of hourly employment for a small business

There are lots of great things about hourly employment for small businesses that impact both the worker and the employer. The first is flexibility.

Hourly workers are able to enjoy a flexible schedule that benefits their personal needs. For example, you may have two or three hourly employees who work various shifts depending on what’s needed for the business and what they need outside of it. Common examples include a student who works nights a few times a week so they can go to school in the day, or a worker who thrives in a fast-paced environment, and loves the busy morning shift.

Flexibility is a perk because it allows for both parties to get what they want and need. Plus, it can reduce stress during scheduling times. After all, knowing that you’ve got some wiggle room when planning your team schedule is a great feeling.

Another perk? Overtime. Hourly employees are able to accrue pay for the extra time that they worked. This isn’t just a plus for your team who may want to earn some extra cash now and then, but for you or your scheduling manager, too. 

Knowing that workers can take on extra hours above and beyond 40 hours per week if needed can be a huge relief. This is especially valuable during busy seasons or unexpected rushes, like when your hometown’s football team wins and the city is celebrating—even the folks who can’t tell a homerun from a touchdown.

Depending on your local labor laws, hour workers also get paid breaks. This keeps them rested and recharged, so your customers get the best version of the support and your business gets productive employees.

The cons of hourly employment for a small business

Now let’s explore the cons of hourly employment for a small business, starting with cost.

Depending on how often and for how long your employees are working, your hourly team may start accruing overtime. That means if you’re not keeping track of your schedule or time logs, you might not have budgeted for this type of pay.

Another con of hourly workers is scheduling. The flexibility that your employees can provide can also come with scheduling chaos: who takes what shift, who’s available when, who can’t come in on what day, who’s maxed out on hours… the list of questions goes on. Without a proper way to track, monitor, and communicate, flexibility can quickly turn from a perk to a problem. 

Speaking of scheduling chaos, let’s talk about the potential admin burden of paying hourly workers. If your business isn’t using modern tools to help you stay organized and on top of federal and local labor laws, you might be dealing with hours-upon-hours of HR-type work. This includes making sure that you’re abiding by overtime rules, tracking hours properly, and processing payroll accurately.

If it sounds like it’s a lot, well, it is. And that’s exactly why companies like Homebase are here: to help with the stuff that you just don’t have time for—but more on that in a bit. 

The pros of salaried employment for a small business

Thinking of hiring salaried employees for your small business? Good news: there are some pros to doing so. The first is stability.

Wait: stability and small business in the same sentence? Yup, it is possible.

When you hire salaried employees, you’re committing to a consistent team member, payment schedule and amount, and a budget. This frees up a bit of admin time because your employee’s pay isn’t directly tied to how many hours they worked, which means you don’t have to monitor the time—unless you want to.

Stability can also increase loyalty: a word that we don’t often hear when speaking about work, especially considering the fact that only 36% of the world’s working population is actively engaged in their jobs. Although that number’s pretty scary, stability can help combat it.

When an employee feels like you’ve made a commitment to them, they make that commitment back. It’s like a long-term investment where employees can continue to learn and grow, and your business gets to benefit from the expertise that they continue to bring to the table.

Not only does this mean that your employees get the opportunity to grow and develop as your business does, but also that your hiring needs might drop. Without the turnover, you don’t have to worry about new job descriptions, interviewing, onboarding, and training. But if you do find yourself in that position, your long-term salaried employee might be capable of taking that role on for you. 

The cons of salaried employment for a small business

Last but not least, the cons of salaried employees for your small business. Let’s start with overtime. Salaried employees might not be entitled to this perk, which means they might not be up for working extra hours. This can be a con, especially in busy or peak periods.

Next is burnout. If your salaried employees are putting in the extra time without the reward, they might end up tired, disengaged, or stressed, and you might see a drop in productivity: all signs of burnout.

There’s also admin complexity to deal with. Although you might not be spending your time tracking errors and making complex schedules, your business still has labor laws and regulations that it needs to abide by. 

What are the challenges that arise from paying hourly employees?

Hourly employees can be the key to running a successful small business, but there are common challenges when it comes to paying them. And we’re not just talking about budget challenges—we’re referring to everything that comes before the paycheck is delivered.


Making schedules is the best part of your day… said no small-business owner ever. When you have hourly employees, you’ve got a lot to consider: their time, your needs, their capabilities, your customers’ demands, the list goes on (and on and on).

Fortunately, there are tools like Homebase that make scheduling a lot less chaotic, and even automatic. With Homebase’s scheduling software, you can automate the process of scheduling your team, and do it all online.

One perk of doing it online is that your schedules are stored on the cloud. This gives easy access for your hourly employees, and for you, as well. If you need to make on-the-go changes, you can do so anywhere, and your employees get updates right away.

Bonus? With Homebase’s monthly schedule maker, your hourly workers even get calendar reminders about their work schedule and email reminders when their shift is coming up. 

Tracking hours

If you have hourly employees, you need to make sure that you’re keeping track of their hours. This includes when they clock in, clock out, go on breaks, or take time off. You’ll also need to make sure that they’re working when they say they are, and not taking part in activities like buddy punching or other forms of time theft.

This can be difficult if you’re using out-of-date tools or low-tech options, like paper logs or manual timesheets. The good news? There’s an easier way to track hours and monitor time: online time clocks.

Online time clocks are like modern-day gifts from the small business gods. It’s a digital way for your employees to clock in and out of their shifts, and connects with your online timesheet or time tracking software to calculate hours and create payroll reports and wages for each team member.

Time clocks can even help with buddy punching, which is when a team member asks a coworker to clock in for them before they’ve actually arrived at work. This can happen purposefully, when they don’t want to deal with a boss or to be reprimanded, or more innocently, when they’re running late and don’t want to lose out on wages, but aren’t thinking about the financial impact on the business.

With Homebase’s time clock tool, you’re alerted when an employee is late signing into their shift, and can see a photo of the worker when they clock in, so you can rest assured the right individual is doing the logging in. 

Processing payroll

If you’ve done this before, you know that processing payroll can be a pain in the neck. Literally. You’re pouring over paperwork, timesheets, and labor laws, making sure that everything is accurate and on time. It takes a lot of time and energy—but it doesn’t have to.

Imagine an automated payroll process for your hourly employees, where timesheets are instantly converted into hours and wages in payroll, and wages and taxes are already calculated for you, and the correct payments are sent to your workers, the state, and the IRS.

Hi, we’re Homebase. And yes, we do all of the above.

More specifically, Homebase’s payroll tool does it all. It comes with a complete toolkit for paying your hourly employees that includes scheduling tools, online time clocks and timesheets, and built-in messaging to help the tracking and coordination of shift swaps and covers. 

Payroll also includes automation of the typical challenges that come with hourly emp;poyees, like managing overtime and wage calculations, bonus payments or commissions, automated payroll tax payments and filings, and paid-time-off policies and tracking.

It’s a tough job, but someone’s gotta do it. And that someone doesn’t have to be you. 

How to pay hourly employees

The process of paying hourly employees can vary depending on the size of your business, but ultimately, it includes a variety of steps. These include: 

Capturing all employee information

Before you can pay your workers, you need to have all of the essential information, like personal details, tax forms, and bank account details if you’re paying them via direct deposit.

Tracking time and attendance

You’ll need to know when employees have worked, when they took breaks and for how long those were, and monitor time off, including sick days and paid time off.

Calculating pay, taxes and deductions

This includes gross pay and net pay, and what gets deducted for taxes. You’ll need to consider regular hours worked, overtime hours, and, if applicable, bonuses or commission. When calculating net pay, you’ll subtract the total taxes and deductions, to come up with the final take-home pay.

Processing payroll

This is the act of preparing the payroll records and making the paychecks or depositing the pay into your employees’ bank accounts. You’ll need to include your employee’s name, pay period, pay rate, hours worked, deductions, and net pay so they can have an accurate picture of where their money is coming from and where it went.

Paying employees

The best part! (At least, for your employees.)This is the actual distribution: direct deposit or paycheck on an agreed-upon pay schedule, like weekly, bi-weekly or monthly. Make sure to give your employees pay stubs or digital statements. 

Once your employees are paid, set aside a portion for payroll taxes, since you’ll have to remit payroll taxes and deductions. Make sure you’re keeping an accurate record of payroll, including earnings and deductions. A good tip is to keep this information on record for at least a couple of years.

Lastly, stay compliant. You’ll want to stay up-to-date with labor laws, and any changes to them. This isn’t just helpful—it’s the law. 

The best way to pay employees

The best way to pay employees, whether they’re salary or hourly workers, is through accurate and automated services that are designed for small businesses. Like us: Homebase.

We get it. Running payroll can be a headache, especially if you’re doing it manually. There are so many factors on the federal and state level that you need to stay on top of during every pay period, and that on its own is a lot. 

But when you use the Homebase payroll app, your payroll calculations are automated. This means that your time is freed up from reviewing timesheets, coordinating social security numbers, deductions, and double checking if your morning worker switched to afternoons again last week.  All of your online payroll information, including timesheets and communication, is tracked and covered by Homebase. 

Let’s dive in, and see how we make this easy, starting with time cards.

How Homebase can help with time cards

Homebase converts your wages, hours, and minutes into your payroll summary report. Then Homebase calculates those wages and deposits the funds into their bank accounts as part of their annual salary or gross pay.

With Homebase, all of your data is kept in one place. Everything is synced to payroll, from hours worked, to breaks, to overtime. This helps prevent mistakes, meaning your employees get paid the right amount. Plus, keep your records all organized in the cloud so you’re ready for any audits or compliance issues. You know, the important stuff.

Homebase also helps with the legal stuff, like staying compliant with labor laws, and helping to create policies that manage and communicate time off. We’ll also support you when it comes to taxes. Calculate your payroll taxes, automatically submit your new hire reporting, plus file and distribute W-2s and 1099s, all in one place.

Last but not least—especially for your employees—Homebase’s payroll tool gives your team early access to their wages so they can handle emergency expenses. Which means you get a boost in employee satisfaction with no cost or liability to you, and all without an impact on your payroll.

Ready to become a payroll pro? Homebase can help make payroll feel all gain, no pain in one easy app. Get started for free.

Hourly versus salaried employees FAQs 

Should my small business pay my employees a salary or hourly?

If you’re still wondering if your business should pay your employees a salary or stick to hourly, start by asking yourself a few more questions. A good way to start is by asking yourself: What are the needs of my business? What are the tasks and time commitments needed for each?

You’ll also want to consider local labor laws, your overall budget, customers demands, and your ability to commit to a salaried employee, even in slower seasons. 

How can I streamline my payroll process?

If you’re looking to streamline your payroll process, look for tools like Homebase that are designed for small businesses with hourly employees.

A full-service payroll provider can save you time and keep your records stored and accurate, reducing the risk for errors and helping you stay compliant with labor laws. 

What is the best way to pay my employees?

The best way to pay your employees is accurately and on time. This is the case for both hourly and salaried employees. Using a full-service payroll provider, like Homebase, can help with this, making payroll easy, automated, and accurate.

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