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Employment Income

Employment Income

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Author: Sophia Tutorial
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Explain how individuals earn income through direct employment.

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Tutorial

what's covered
In this lesson, you will identify the different forms of employee earnings. We’ll also consider how skills like agility, problem solving and technology play an important role no matter your job. Specifically, this lesson will cover:
  1. Income Versus Earnings
  2. Sources of Earnings
    1. Wages
    2. Salaries
    3. Commissions
    4. Bonuses
  3. Who Makes More Money?

1. Income Versus Earnings

Income is a broad term used to describe all sources of money obtained by individuals and households. Income can include allowances, public assistance, interest, dividends, Social Security payments, and retirement payments (we will cover some of these forms of income in later topics). In fact, the U.S. Census Bureau collects data on more than 50 different sources of household income. Earnings are just one form of income. Earnings are compensation received for services performed for an employer.


terms to know

Income
A broad term used to describe all sources of money obtained by individuals and households that can be spent or saved.
Earnings
Compensation received for services performed for an employer.


2. Sources of Earnings

How much do you earn? If asked this, would you respond with something like, “Oh, I earn $9 per hour,” or “My income is $43,000 per year,” or “It’s none of your business”? Now, could you identify if those earnings are in the form of a wage or salary? Actually, aren’t a wage and a salary the same thing? The answer is “no.” These two forms of earnings are quite different.

  • A wage is what an employer will pay an employee to work. Almost always, wages are based on an hourly rate.
  • A salary is payment for work for a set period of time, usually an annual amount.

Other forms of earnings include:

  • A commission, which is a payment based on the sale of a product or service.
  • A bonus, which is an extra payment usually based on performance or meeting certain production or sales requirements.

This illustration shows examples of these four sources of earnings.

an infographic with four quadrants: hourly wages earned by a restaurant worker, a yearly salary earned by a professional, commission earned on the sale of a home, and a bonus earned for exceeding a company goal.

Being strong in the 10 skills can have a real impact on your earnings. Think about a job or jobs you’ve already had. What skills were required to perform your best? To what extent were agility, problem solving, and technology skills necessary for success? What skills did you learn in each job? How did learning these skills contribute to improving your ability to be effective in your work? Did these new skills increase your earning potential? An increase in your earnings can lead in increased income and increased financial stability.

terms to know

Wage
What an employer will pay an employee to work.
Salary
Payment for work for a set period of time, usually an annual amount.
Commission
A payment based on the sale of a product or service.
Bonus
An extra payment usually based on performance or meeting certain production or sales requirements.
2a. Wages
The most common wage is based on an hourly rate. The math is simple.
  • You earn a set dollar amount, say, $8.00, for every hour worked.
  • Federal rules define a regular work week as 40 hours, which is basically 8 hours per day for 5 days a week.
  • If you earn $8.00 per hour, you will earn $320 per week before taxes and other payroll deductions.

Some people also earn a wage based on the number of products produced per hour or tasks completed, but this is relatively rare. The following image shows an example of an earnings statement for a pay period for someone who earns a wage.


a pay stub from Gotham City Records; major sections include employee information (address, title, pay rate), hours and earnings, tax withholdings, employer-paid benefits, vacation and sick hours, and net pay distribution.

Minimum Wage. The U.S. minimum wage is currently $7.25 per hour. This wage is periodically reset by Congress through the Fair Labor Standards Act, which was passed in 1938. However, many people earning a wage might receive more or less than the minimum wage, depending on the type of work and/or the city and state in which the work takes place.

Overtime. Workers who fall under the Fair Labor Standards Act must be paid at least one-and-one-half times, or what is known as “time and a half,” their regular wage when they work overtime.

  • Overtime is defined as working more than 40 hours in one week.
  • Although overtime pay can boost earnings, it is unwise to plan to earn overtime over a long period of time.
  • Most employers try to limit overtime pay because it can quickly become costly for the business.
try it
Jarvis needs your help in determining how much he can potentially make if he accepts a job and works 50 hours a week. Assume the job has the following conditions: (1) $10 base rate per hour and (2) “time and a half” for any work more than 40 hours per week.


Here’s the solution:
Jarvis can earn $550 per week. He will receive $400 based on earning $10 per hour for his regular 40 hours ($10 cross times 40 hours), plus $150 for “time and a half” ($15 per hour) for every hour more than 40 that he works ($15 cross times 10 hours).


terms to know

Minimum Wage
Federal and state regulations that determine the minimum amount that can be legally paid to an employee.
Fair Labor Standards Act
Passed in 1938, legislation designed to protect those paid by the hour, such as imposing minimum wage requirements on employers.
Overtime
Working more than 40 hours in one week.

2b. Salaries
Many employees prefer being paid a salary instead of an hourly wage. Recall that as opposed to a wage where you earn money by the hour, a salary extends over a set time period, most often a year. When you are offered a job with a salary, the amount offered will be set in annual dollar terms, such as $42,000 per year. Those who earn a salary generally do not receive overtime pay (there are exceptions for those who earn less than $40,000 per year) but are instead expected to complete their work assignments regardless of the time involved.


In general, there are two significant advantages associated with receiving a salary versus a wage.

  1. Those on a salary typically earn more than hourly workers, at least before overtime pay is included.
  2. Those on a salary tend to receive better employee benefits than those working for a wage. For example, an hourly worker may receive 2 weeks of paid vacation, whereas a salaried employee in the same firm might receive 3 or maybe 4 weeks of paid vacation each year.

2c. Commissions
It is also possible to generate income by earning a commission on the sale of a product or service. Most salespeople are paid, in part, by commission.


EXAMPLE

Let's say a large department store hires you as a salesperson for the holiday season. The firm’s policy may be to pay you a minimum wage plus 10% of all sales made. If you work 8 hours and sell $1,000 of clothes:
  • Your base wage would be $58 ($7.25 per hour x 8 hours).
  • Your commission would be another $100 ($1,000 x 10%).
  • Your total earnings would be $158, thereby increasing your wage to nearly $20 per hour ($158 / 8).

2d. Bonuses
Sometimes companies offer a bonus to employees as a way to improve productivity or to reward high-performers. This is the least common way Americans are paid.
  • A firm might, for example, offer a bonus to any salesperson who sells more than a target level of product.
  • Companies may even sometimes provide all employees a bonus if the firm exceeds certain profit targets.

IN CONTEXT

For example, assume Jamal works for a large corporation. The president of the company may decide that everyone in the firm will receive a bonus if the company exceeds a profit benchmark. The president’s thought is that Jamal and other employees will work harder if they know that they will receive a bonus by exceeding expectations.


hint
You should consider any bonus as extra income. Building long-term financial plans in the hopes of receiving a bonus can be problematic because firms are generally not required to make bonus payments.

Agility: Why Employers Care
In today’s modern world, there are many different ways you can earn income outside of a traditional nine-to-five role. But, whatever career you decide to pursue, you’ll need to be able to adapt to unexpected situations that stretch your knowledge and abilities from client to client, project to project, or job to job.


3. Who Makes More Money?

When you are just starting out on your lifetime financial journey, it is likely that you will be paid a wage. This is particularly true if you are in high school or college. Nearly every part-time job pays a wage, not a salary. As you gain additional education and experience, it is quite probable that you will be offered a salaried position.


hint
Remember, when you earn a salary you know exactly how much you will be paid, regardless of the time you spend on a project or activity, but this often means working more than 40 hours per week.


The table below compares the average income of those who earn wages, salaries, and commissions. Two striking takeaways emerge from a review of these data.

  1. The difference in pay for those working in management positions, compared to those in nonmanagement jobs, is significant. This pay differential underscores the importance of human capital in driving your lifetime earnings. Typically, those in a management position earn more because these positions require more education and experience as well as the supervision of others.
  2. Some of the highest paid workers today earn their living primarily by selling products and services. Put another way, they earn a commission. It is not unreasonable for a good salesperson to earn $50 or more per hour on average!
Source: U.S. Bureau Labor Statistics (2016).

Annual Average Pay Hourly Average Pay
Average American $48,320 $23.00
Dry cleaner worker $22,660   $10.89
Bus driver $32,980   $15.86
Upholsterer $33,550   $16.13
Dental technician $40,520   $19.48
Mechanic $42,990   $20.67
Flight attendant $46,750   $22.48
Business manager $48,320   $23.23
Credit counselor $49,310   $23.71
Registered nurse $68,450   $32.91
Food service manager $84,470   $40.61
Information analyst $90,600   $43.56
Sales manager $130,400   $62.69

summary
In this lesson, you learned that earnings are one form of income. Earnings are paid by an employer to an employee for their service. Earnings can come from several different sources. Employees might earn wages based on an hourly rate of pay, or they might earn salaries based on an annual rate of pay. Employees may earn commissions on the sales of products and services or earn bonuses from an exceptional performance. From these sources, you might be asking, who makes more money? The answer to that question depends on your background, qualifications, and tolerance for taking risks. Strong technology, problem solving, and agility skills can help you maximize both your earnings and your income.

Source: THIS WORK IS ADAPTED FROM CHAPTER 3.2 OF JOHN WILEY & SONS, INC. EBOOK, “INTRODUCTION TO PERSONAL FINANCE: BEGINNING YOUR FINANCIAL JOURNEY” BY JOHN E. GRABLE PHD, CFP AND LANCE PALMER PHD, CPA, CFP.

Terms to Know
Bonus

An extra payment usually based on performance or meeting certain production or sales requirements.

Commission

A payment based on the sale of a product or service.

Earnings

Compensation received for services performed for an employer.

Fair Labor Standards Act

Passed in 1938, legislation designed to protect those paid by the hour, such as imposing minimum wage requirements on employers.

Income

A broad term used to describe all sources of money obtained by individuals and households that can be spent or saved.

Minimum Wage

Federal and state regulations that determine the minimum amount that can be legally paid to an employee.

Overtime

Working more than 40 hours in one week.

Salary

Payment for work for a set period of time, usually an annual amount.

Wage

What an employer will pay an employee to work.