In an ideal situation, new hires would start their job at the beginning of a pay period and departing employees would leave at the end of a pay period. Much to the chagrin of employers, however, payroll doesn’t usually work out that way. To pay employees correctly, it’s sometimes necessary to know how to prorate a salary.
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What is a prorated salary?
Normally, exempt employees are entitled to receive their full, standard salary as long as they work some part of a workweek, regardless of the total days or hours. There are some cases, however, where an employer may be permitted to issue a prorated salary, meaning exempt employees are only paid for the time they actually perform labor.
Reasons to provide a prorated paycheck
Prorating a salary may sound like a great way to incentivize productivity and improve performance, but it’s not always permissible. In fact, the practice is limited to circumstances where exempt employees:
- Depart or join a company in the middle of a payroll cycle
- Earn a raise in the middle of a payroll cycle
- Receive an annual bonus before working a full year
- Take unpaid leave under the Family Medical Leave Act (FMLA)
- Are suspended without pay for one or more full days due to misconduct
How to prorate a salary for an exempt employee
Prorating a payment for an exempt employee requires employers to convert the salary to an hourly rate, which can be done by dividing total pay by hours worked. The entire calculation is essentially a two-step process:
- Divide the employee’s salary by the number of hours the employee is expected to work per year
- Multiply the result by the total hours the employee actually worked during the prorated period
How to prorate salary example
An exempt employee has an annual salary of $60,000 per year, is expected to work 40 hours per week and is paid weekly. During the first week of employment, this individual only worked three days. What is the payment due in this prorated salary example?
- $60,000 / 2,080 hours (40 x 52) = $28.85 hourly rate of pay
- $28.85 x 24 hours = $692.40 prorated wages
How to prorate salary for a pay raise
Making pay raises effective at the beginning of a new pay period eliminates the need for prorated pay and simplifies payroll. If that is not feasible for some reason, employers will need to prorate salary for two rates – one for the initial salary and another for the increased salary.
Frequently asked questions about how to prorate salary
Why is it important to know how to find prorated salary?
Prorating salaries, when permissible, is an important part of controlling payroll costs. If employers don’t know how to perform the prorated calculations correctly, they could end up overpaying salaried employees for time not worked.
What do I do if a prorated salary is incorrect?
A prorated salary is usually less than what an exempt employee usually earns. If the payment is incorrect, the employer may need to issue back pay for the amount still owed to the employee.
This guide is intended to be used as a starting point in analyzing prorated salary and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.