What Does Prorated Salary Mean?

Ideally, employees paid on salary would always adhere to their working schedules. Such that while calculating the pay, it would be a walk in the park. You would just pay them a certain fixed price per period, and that’s what would be on the pay stub.

But sometimes it is not this way. Salaried workers leave work on some days. Sometimes, they may not clock the number of hours per day as expected. When this happens, you will need to prorate their salary. This can be a little complex, but here, we’ll discuss how you can go about it. Let’s dive in to find out “What is prorated salary?” and everything else.

What Is Prorated Salary?

A prorated salary calculates the amount of money an employee is paid. This is according to the number of hours or days they worked in the particular pay cycle. It is periodically used when someone working on salary doesn’t fulfill an agreed-upon number of working hours. This only applies to salaried employees, not hourly ones.

This is because the hourly employees are only paid according to how many hours they have worked in that period. In that case, they do not have fixed wages. Speaking of the prorated salary, a company determines the hourly or daily rate of salary earners. Then, they apply it to every period when the pay was earned. This guarantees that employers pay them in relation to the number of working hours. 

Situations When You Can Prorate Employees’ Salary

Basically, prorating the salaries of the employees can be necessitated for the following reasons: 

Unpaid Leave

It is common for employers to give employees what is prorated salary as a result of time off. However, there is no provision for paid time off in this case. This means no build-up of “normal” pay occurs during such absences. Their normal hourly rate and annual compensation serve as the basis for this calculation. The prorated salary accounts for the days when they didn’t work. 

Starting Mid-Pay Period

Employers are not required to cover the full pay period if a new hire starts in the middle of it. In this case, prorating their pay is appropriate. The initial paycheck only shows the days worked because they haven't worked the entire term. For instance, the company pays biweekly, and an employee starts working there on January 15th. The employee's first payment covers January 15–31, which is the period they’ve worked.

Mid-Cycle Departure 

Prorated wages apply to employees leaving in the middle of the pay cycle as they apply to new hires. It provides equitable remuneration if an employee leaves or is fired before the conclusion of a pay cycle. Only the hours worked, as determined by their hourly rate, are shown in the final payout. Pay for the partial time is decided by the employer in accordance with the employment contract. A prorated wage can be used when sending an employee's final payment regardless of whether they quit or are fired.

Promotion or Pay Raise Mid-Pay Period

An employee's paycheck may display two rates when they receive a promotion or raise during the pay period. One is the previous salary for the days before they got the raise. The other is the new salary for the days following the raise. Let’s paint a picture. Say you promoted your employee on the 10th of June, and you pay biweekly. The first 10 days will carry the old rates, and the remaining 5 days will show the new rate. Their pay would be divided between the old and new rates for the days leading up to and following the promotion.

Working Part-Time With a Fixed Salary

Part-time workers put in fewer hours than full-time workers. So, their pay is prorated according to the number of hours they work. This guarantees that their pay is proportional to that of full-time employees.

Holidays

Prorated compensation may result from fewer work hours due to holidays within a pay period. Pay may be unaffected by holidays, though. This is because some firms give paid time off.

Disciplinary Action

For unpaid disciplinary actions, employers may prorate compensation. Labor regulations permit pay reductions for salaried employees who miss a full workday for disciplinary reasons.

Although prorating is a widely used and recognized payroll procedure, there are several situations in which it is illegal. For instance, workers' pay cannot be prorated when they are summoned for civic responsibilities. This may include jury duty, testifying in court, or serving in the military.

How to Calculate What Is Prorated Salary

Here are simple steps to follow to calculate what is prorated salary for your employees:

1. Determine Annual Salary 

For you to get “What is prorated salary for an employee?”, you need the actual number of days they worked. You also need to know their daily pay rate. To arrive at this, start with the employee's yearly salary. This number is the sum they would make in a year if they worked all of their allocated hours. And they didn't take any unpaid time off. This is the foundation for your calculations. 

2. Find the Daily or Hourly Rate 

Once you know their yearly pay, divide that by the total number of workdays in a year. This gives you their daily pay. However, you may also need to know the hourly rate, depending on your pay structure. For this, divide the yearly compensation by the total number of hours worked in a year.

3. Calculate for Specific Days or Hours Worked

The final step is to make adjustments for the days or hours actually worked. Only the days or hours that an employee worked should be used to determine their compensation for the pay period. To determine their prorated compensation, multiply the daily rate by the number of days worked. If it’s hourly pay, multiply the hourly rate by the hours worked.

Examples of “What Does Prorated Salary Mean?” 

Here are some examples to help you understand “What does prorated salary mean?”:

Example 1: Prorated Salary for a New Employee

Sarah joins a company on November 10th with an annual salary of $50,000. The company pays employees semi-monthly on the 15th and the last day of the month.

Step 1: Determine Sarah’s daily rate. $50,000 / 260 workdays = $192.31 per day

Step 2: Calculate the number of days worked in the first pay period. Sarah worked from November 10th to November 15th. This totals up to 5 days.

Step 3: Calculate the prorated salary for the first pay period. $192.31 per day x 5 days = $961.55

Sarah’s first paycheck will be $961.55 for the period from November 10th to November 15th.

Example 2: Prorated Salary for a Pay Raise

John is promoted on May 10th with an annual salary increase from $70,000 to $75,000. The company pays employees monthly.

Step 1: Calculate the daily rate before the promotion. $70,000 / 260 workdays = $269.23 per day

Step 2: Calculate the daily rate after the promotion. $75,000 / 260 workdays = $288.46 per day

Step 3: Determine the number of days at each pay rate in May. 

Before the promotion: May 1st to May 10th = 10 days 

After the promotion: May 11th to May 31st = 15 days

Step 4: Calculate the pay for each period and sum them. 

Before promotion: $269.23 per day x 10 days = $2,692.30 

After promotion: $288.46 per day x 15 days = $4,326.90

Step 5: Add the amounts from both periods. $2,692.30 + $4,326.90 = $7,019.20

John’s paycheck for May will be $7,019.20, reflecting his pay before and after the promotion.

Final Thoughts

Prorated pay guarantees that professionals across organizations and employment situations are paid for the hours they put in. This method of pay comes with precise calculations. This makes it easier for the employers to maintain correct pay records. It will also ensure that payroll records are precise and accurate, creating trust between the employer and employee. It is very important to implement an effective approach to payroll and compensation. This ensures smooth running and friendly relations with the employees.

At our pay stub generator, we acknowledge how payroll processing is far from pretty and straightforward. Let alone prorated salaries. Our tools help make it easy for you to get this done effectively. We help you maintain accuracy when issuing employee remunerations. Our paystub generator will come in handy when calculating pay for newly hired employees, promotions, and, certainly, prorated salaries. Let us take care of your payroll to allow you to concentrate on growing your enterprise.