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While you may be flying solo as you start your small business, at some point you may want to hire people to help you grow your business.
Not to state the obvious, but when you hire people, you have to pay them.
And while you know you have to pay them, you may not know where to begin when it comes to determining what to pay them. That “what” is typically called base pay.
Understanding the meaning of base pay is why we are here today. In this article, we will share everything you need to know about base pay, including how to determine base pay, how base pay plus other benefits impact your total compensation package, and what pitfalls to avoid when calculating base pay.
Base Pay Meaning
Base pay refers to how much you pay an employee for the work they do that does not include benefits, bonuses, commissions, or tips. Base pay can be calculated as an hourly rate or an annual salary, which is often determined by employment status. We will review what that means in a minute.
Once you decide if you are paying new hires a salary or hourly, you will then determine what cadence you would like to run payroll and issue paychecks. This could be done weekly, bi-weekly, or monthly.
The hours worked that go into each paycheck are called a pay period. Each paycheck typically includes one pay period. Note that taxes and other deductions such as 401(k) contributions and health insurance premiums are taken out of a person’s paycheck each pay period.
Hourly employees track the hours they work each week by completing a timecard and are paid based on their hourly rate and the number of hours they worked in the pay period. Salaried employees earn a flat base pay amount each pay period.
We run through some sample base pay calculations later in this article. Note that you could have both hourly and salaried employees on your payroll.
Non-Exempt vs. Exempt Employment Status
Deciding whether to pay your employees a base pay hourly rate or a salary depends on their employment status as an exempt or non-exempt employee. Those definitions and pay requirements for each status are part of the Fair Labor Standards Act (FLSA).
In a nutshell:
Non-exempt employees are typically paid an hourly base pay rate and perform routine tasks. They are required to be paid at least the federal minimum wage or state minimum wage if it is higher. Non-exempt employees are also entitled to overtime pay of 1 ½ times their hourly rate for any work over 40 hours per week.
Exempt employees are typically executives and professionals who are paid an annual salary for their services. They are exempt from federal minimum wage and overtime pay requirements, but must meet other requirements to qualify as exempt, which include being paid a fixed salary of at least $684 per week regardless of the quality or quantity of their work.
It’s critical to classify any new hire properly and to follow the regulations based on their employment status. Not doing so could lead to fines, and nobody wants their small business fined by the federal government.
Contract Workers and Freelancers
As you are growing your team, you may consider hiring independent contractors or freelancers. These types of workers are vendors just like any other supply vendor you do business with. You don’t have to worry about determining base pay, following employment regulations, or covering payroll taxes with these types of workers because they are not on your payroll.
Determining Base Pay
Now that you understand what classification of employee you want to hire to be part of your team, let’s get back to determining base pay.
A good place to start is to research the going base pay rate in your regional area for the role you want to fill. The US. Bureau of Labor Statistics tracks the average hourly earnings for different types of jobs in different regions across the country.
You can also do some research on what your competitors are offering by using job board tools like Glassdoor and LinkedIn.
Base pay + compensation
You want your base pay to be competitive for your industry and your geographical area. However, while base pay can be the only compensation you offer, you can also attract top talent by offering a higher pay rate with other compensation opportunities, such as tips, commissions, bonuses, and overtime.
Base pay can also be part of a total rewards compensation package. This includes additional benefits such as health insurance, paid vacation and sick leave, 401(k) match opportunities, holiday bonuses, or well-being perks like discounted gym memberships or pet insurance.
But those perks come at a cost to you as the business owner. It’s important to take the time to think through just how much you are willing and able to offer prospective new hires from a total compensation perspective – base pay, benefits, bonuses, commissions, overtime, etc.
Flexibility when hiring
It’s also a good idea to have some flexibility when it comes to base pay as you go through the hiring process. You may want to offer candidates with more experience a higher base pay. You could also increase the base pay if they have earned professional certificates or hold advanced degrees in a relevant field.
If you are anxious to fill the role and the candidate feels like they would be a great addition to your team, you could bump up the base pay or total compensation package to get them onboard.
Typically when you advertise a job opening and discuss pay with prospective candidates, you talk about the annual salary base pay and the hourly rate base pay. Then you can include any other compensation as a value add. It’s challenging to discuss annual pay for hourly employees since hours could vary by week.
Ultimately you have the final say in what base pay, benefits, and other compensation you are willing to pay as long as you fall in line with government regulations.
Calculating Base Pay
So, we have worked through the difference between a salaried and hourly employee, how base pay fits into the overall pay rate and total compensation package, and factors that go into determining what base pay rate you want to offer prospective talent.
Here are some examples of how base pay is calculated to give you an idea of how much employee pay will impact your business’s bottom line.
Example 1: Salary Base Pay
If you offer a $50,000 annual salary and pay your employees every two weeks, here is how to calculate the amount you will pay each pay period:
(annual salary) ÷ (number of pay periods per year) = (gross pay per pay period)
$50,000 ÷ 26 pay periods = $1,923.07
Example 2: Hourly Base Pay
If you pay $15 an hour, here is how to calculate the amount you will pay each pay period if the employee works 32 hours in a week and you pay employees every two weeks:
(hourly rate) x (number of hours worked each week) x (number of weeks in the pay period) = (gross pay per for that pay period)
$15 x 32 x 2 = $960
Example 3: Hourly Base Pay for Inconsistent Weekly Hours
Using the same example of a $15 hourly base pay rate, one week the employee worked 32 hours and the second week the employee worked 10 hours:
(hourly rate x number of hours worked in week one) + (hourly rate x number of hours worked in week two) = (gross pay per for that pay period)
($15 x 32 = 480) + ($15 x 10 = 150) = $630
When Money Isn’t Everything
As a small business owner, you are accustomed to being lean. Compensation can take up a large part of your operating budget. As you recruit people to join your team, be sure to sell them on your vision.
In today’s world, people are more likely to work for lower base pay if the company values and culture align with their own. You may not be able to compete with others from a financial perspective, but you have so much to offer from a value and experience perspective!
Homebase Makes Hiring and Payroll Easy
Simplify your payroll and ensure you stay in compliance with hourly reporting and overtime requirements with Homebase. With just a few clicks, you can manage timesheets and complete payroll, giving you time back for running your business.
Hiring your first employee? Check out our New Hire Training Checklist and Onboarding Guide.
Get your new business up and running with Homebase.
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