Converting a salary to an hourly rate (and back again)

One job pays a salary, another an hourly rate, a third a day rate. To compare them you need them on the same footing, and the arithmetic is easy: the hard part is deciding which hours to count. This guide covers the formula, the effect of paid leave and overtime, how tax changes the picture, and why a contractor’s rate needs to be well above a salary divided by hours.

The basic formula

Converting between pay periods always goes through an annual figure:

• hourly rate = annual salary ÷ (hours per week × paid weeks per year)
• annual salary = hourly rate × hours per week × paid weeks per year

“Paid weeks” is normally 52 for an employee, because paid holidays and public holidays are part of the salary. For a salary of 45000 the result depends heavily on the length of the working week:

Five hours’ difference in the working week moves the hourly equivalent by more than three units. When comparing offers, check the contracted hours, not just the salary. The salary to hourly calculator takes your own hours and weeks and shows every pay period at once.

Which hours to count

Contracted hours are the starting point, but they are not the whole story:

• Unpaid breaks. A 9-to-5 day with an unpaid hour for lunch is 7 paid hours, not 8.
• Unpaid extra hours. If a salaried role routinely runs to 45 hours, the effective hourly rate is the salary divided by the hours you really work.
• Part-time and compressed weeks. Use the actual weekly hours; the number of days does not change the hourly rate, only daily pay.
• Unpaid leave or seasonal gaps. Reduce paid weeks below 52 to reflect them.

How paid leave changes the answer

A salaried employee is paid during holidays. Dividing by 52 weeks gives a rate that is comparable with an hourly job that also pays holiday. Dividing by the weeks actually worked gives what you earn per hour at work, which is the fairer comparison with freelance or casual work that pays nothing when you are off.

Minimum entitlements vary. UK workers are entitled to 5.6 weeks of paid holiday a year, which may include bank holidays. In Australia, full-time employees get 4 weeks of paid annual leave under the National Employment Standards. Germany’s Federal Leave Act sets at least 24 working days on a six-day week, equivalent to four weeks. In the US there is no federal requirement for paid vacation, as the Department of Labor notes; it is a matter of employer policy.

With 5.6 weeks off, the rate per hour worked is about 12% higher than the headline hourly equivalent. Public holidays push it further if they come on top of the leave allowance.

From hourly to annual

Going the other way multiplies instead of dividing, and the same choices apply. 20 an hour at 37.5 hours for 52 paid weeks is 39,000 a year. If the hourly job pays nothing for 4 weeks of holiday, the annual total is 20 × 37.5 × 48 = 36,000, which is the figure to set against a salary.

Two pay-period traps catch people out. A month is not four weeks: a year has 52 weeks but 12 months, so monthly pay is weekly pay × 52 ÷ 12, about 4.33 weeks. And US biweekly pay (26 checks) is not the same as semi-monthly pay (24 checks), so the individual checks differ on the same salary.

Overtime

Under the US Fair Labor Standards Act, non-exempt employees must be paid at least one and a half times their regular rate for hours over 40 in a workweek. Many salaried professional roles are exempt, so extra hours lower their effective hourly rate instead of raising pay. Other countries handle overtime through contracts and collective agreements rather than a single statutory multiplier.

Pay per hour after tax

The hourly rate on a contract is gross. What you keep per hour depends on income tax and social contributions, which the country calculators work out:

• A $60,000 salary in Texas at 40 hours a week is $28.85 an hour gross. After federal tax, Social Security and Medicare it leaves $24.23 an hour (US paycheck calculator).
• A £40,000 salary in England at 37.5 hours is £20.51 an hour gross and £16.57 after Income Tax and National Insurance (UK take-home pay calculator).

Extra hours are taxed at your marginal rate, not your average rate, so the take-home value of overtime is lower again. The marginal vs average tax rate guide explains why.

Employee vs contractor rates

An employee’s salary is not the employer’s full cost. On top of the $60,000 US salary, the employer pays $4,632.00 in Social Security, Medicare and federal unemployment tax. On the £40,000 UK salary the employer pays £5,250.00 of employer National Insurance. Pension contributions, paid leave, sick pay and equipment come on top.

A self-employed contractor pays those costs personally and is not paid for holidays, sickness or time between contracts. A sensible comparison starts from the hours you expect to bill in a year, often well below 52 weeks of full-time hours, and adds the costs an employer would have covered. Dividing a salary by 52 × 40 understates the rate a contractor needs.

Common mistakes

• Dividing by 2,080 hours when the job is 37.5 hours a week.
• Treating monthly pay as four weekly payments.
• Comparing a salary that includes paid leave with an hourly rate that doesn’t.
• Ignoring unpaid overtime in a salaried role.
• Comparing gross hourly rates across countries without looking at tax and social contributions.
• Forgetting minimum wage rules: in the UK, for example, the National Minimum Wage is set per hour, so a low salary spread over long hours can fall below it.

To compare a pay rise or two offers as a percentage, the percentage calculator gives the change, and the income tax bracket calculator estimates tax for countries without their own calculator.

This guide explains how things work in general terms. It isn’t financial, tax or legal advice. Spotted something out of date? Email errors@moneyotter.com and we’ll check it against the source.