Salaried Employee: What It Means for Employers

What it means in practice

Salaried describes how pay is set, not a classification under the Fair Labor Standards Act (FLSA): a fixed amount per week, two weeks, half-month or month instead of an hourly rate times hours. A salaried employee can be exempt, if every element of an exemption is met, or non-exempt and still owed overtime. For tax purposes the label changes little: IRS Publication 15 (2026) says wages subject to federal employment taxes generally include all pay given to an employee for services, and lists salaries among its examples. It also says that if you have a regular payroll period, you withhold income tax for that period even if the employee does not work the full period.

The three tests for the white-collar exemptions. The Department of Labor (DOL) explained in its May 15, 2026 Federal Register notice that its regulations generally require three tests for an executive, administrative or professional employee to be exempt: the job duties must primarily involve exempt duties as defined in the regulations (the duties test); the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work (the salary basis test); and the salary must meet a minimum amount (the salary level test). The same notice says the salary basis and salary level tests do not apply to doctors, lawyers, teachers and outside sales employees. For the duties tests, see exempt vs. non-exempt employees.

What the salary basis test requires. Under 29 CFR 541.602(a), subject to listed exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, without regard to the number of days or hours worked, but need not be paid for a workweek with no work at all. An employee is not paid on a salary basis if deductions are made for absences occasioned by the employer or by the operating requirements of the business: if the employee is ready, willing and able to work, pay may not be docked for time when work is not available. DOL Fact Sheet #17G (revised September 2019) restates these rules.

The salary level and its status in 2026. The regulation requires a salary of not less than $684 per week, excluding board, lodging or other facilities, or $455 in Puerto Rico, Guam, the U.S. Virgin Islands and the Northern Mariana Islands and $380 in American Samoa for employers other than the federal government (29 CFR 541.600(a)). DOL's earnings-thresholds page also lists $107,432 a year in total compensation for highly compensated employees and $27.63 an hour for computer employees paid hourly. Figures from 2024 still circulate, so the history matters. The Federal Register notice at 91 FR 27833 says a September 27, 2019 rule raised the level from $455 to $684 effective January 1, 2020. A 2024 rule would have raised it to $844 on July 1, 2024 and $1,128 on January 1, 2025, but the Eastern District of Texas vacated that rule on November 15, 2024 (Texas v. U.S. Dep't of Labor) and the Northern District of Texas did so on December 30, 2024; the Fifth Circuit dismissed the appeals on May 5 and 7, 2026. DOL states that the operative regulations are the version in place on June 30, 2024, "which the Department has been enforcing," and its technical amendment effective May 15, 2026 put that text back in the Code of Federal Regulations. DOL adds that the amendment does not foreclose future rulemaking, so the level can change again.

Bonuses toward the salary level. Up to 10 percent of the required salary amount may be satisfied by nondiscretionary bonuses, incentives and commissions paid annually or more often. If salary plus those payments falls short by the last pay period of the 52-week year, one catch-up payment may be made by the next pay period, counting only toward the prior year (29 CFR 541.602(a)(3)).

Permissible deductions from an exempt salary. The regulation lists the only exceptions to the no-deduction rule (29 CFR 541.602(b)): absences of one or more full days for personal reasons other than sickness or disability; full-day absences for sickness or disability under a bona fide plan, policy or practice of replacing lost salary, including days before the employee qualifies and after benefits run out; offsets of jury fees, witness fees or military pay received for that week; penalties imposed in good faith for infractions of safety rules of major significance; unpaid disciplinary suspensions of one or more full days imposed in good faith under a written policy that applies to all employees; a proportionate salary for time actually worked in the first and last week of employment; and a proportionate salary for unpaid Family and Medical Leave Act leave. Deductions may use the hourly or daily equivalent of the weekly salary or any other amount proportional to the time missed, and a major safety rule penalty may be any amount (29 CFR 541.602(c)). See how to prorate pay for the arithmetic.

What happens after an improper deduction. An employer that makes improper deductions loses the exemption if the facts show it did not intend to pay on a salary basis, and an actual practice of improper deductions shows exactly that (29 CFR 541.603(a)). The factors include the number of improper deductions compared with infractions warranting discipline, the time period, the number and location of employees and managers involved, and whether the employer has a clearly communicated policy. The exemption is then lost, for the period of the deductions, for employees in the same job classification working for the same managers responsible (541.603(b)). Isolated or inadvertent improper deductions do not cost the exemption if the employer reimburses the employees (541.603(c)). Under the safe harbor, an employer with a clearly communicated policy prohibiting improper deductions that includes a complaint mechanism, that reimburses employees and makes a good-faith commitment to comply, keeps the exemption unless it willfully continues the deductions after complaints. The best evidence is a written policy distributed before the deductions, for example in an employee handbook (541.603(d)).

Extra pay and other pay structures. An exempt employee guaranteed at least $684 a week on a salary basis may also receive commissions, a share of sales or profits, or extra pay for work beyond the normal workweek on any basis, including straight-time hourly pay, time and one-half or paid time off (29 CFR 541.604(a)). Earnings may even be computed by the hour, day or shift with a weekly guarantee of at least the required amount and a reasonable relationship to usual earnings; the regulation's example is a $725 weekly guarantee for someone who normally works four or five shifts at $210 each (541.604(b)). Administrative and professional employees may instead be paid a fee for a unique job, tested against $684 for a 40-hour week (29 CFR 541.605), and public agencies have a separate partial-day rule (29 CFR 541.710).

Salaried non-exempt employees. An employee who is salaried but does not meet an exemption is owed overtime for hours over 40 in a workweek; see salaried non-exempt and overtime. Under 29 CFR 778.113(a), the regular rate is the salary divided by the number of hours the salary is intended to compensate. The regulation's example is a $350 salary for a 35-hour week: the regular rate is $10, and in an overtime week the employee is owed $10 for each of the first 40 hours and $15 for each hour after that. A monthly salary is multiplied by 12 and divided by 52, and a semimonthly salary by 24 and 52, so $1,560 a month or $780 semimonthly for 40-hour weeks gives $9 an hour (778.113(b)). Cutting a fixed salary by the hourly equivalent of hours missed makes the employee, in practice, hourly (29 CFR 778.306). The pay for hours up to the agreed schedule is straight-time pay.

Where states differ. The federal rules are a floor, and some states set a higher salary threshold. As an example, the New York State Department of Labor's minimum wage FAQ says that each time the state minimum wage increases, the state minimum salary for executive and administrative employees rises proportionately, and that from January 1, 2026 it ranges from $1,199.10 per week in most of the state to $1,275.00 per week in Nassau, Suffolk and Westchester counties and New York City, for any size employer and fast food establishments. The FAQ says employers subject to state overtime rules must pay overtime to such employees earning above the federal level but below the state level. Other states set their own thresholds, so check your state labor department.

Recordkeeping. For exempt executive, administrative, professional and outside sales employees, employers keep the basic records required by 29 CFR 516.2(a) except items (a)(6) through (10), which cover the regular rate, hours worked each day and week, straight-time and overtime earnings and additions and deductions, plus the basis on which wages are paid in enough detail to calculate total remuneration for each pay period (29 CFR 516.3). For salaried non-exempt employees, the full 516.2(a) list applies, including hours worked each workday and workweek, the regular hourly rate in overtime weeks and total overtime premium pay. These records feed payroll.

Tax reporting of overtime. IRS FS-2026-13 (August 2026) says employers must report qualified overtime compensation on Form W-2 in box 12 with code TT beginning in 2026. It is overtime required under 29 U.S.C. 207 in excess of the regular rate, so it covers the FLSA overtime premium of salaried non-exempt staff; the IRS says an individual not eligible for FLSA overtime receives none, so extra pay to an exempt employee does not qualify.

FAQ: Can we dock an exempt salaried employee for a partial day off? Not from the salary. Only full-day deductions for personal reasons or under a bona fide sickness plan are listed, except for unpaid FMLA leave, where the regulation's example is a 10 percent reduction for four hours of leave in a 40-hour week (29 CFR 541.602(b)(7)). Do we pay the full salary if we close the office for two days? Yes, if the employee works any part of that week, because deductions for absences occasioned by the employer or the operating requirements of the business are not allowed (541.602(a)(2)). Can an exempt employee get paid for extra hours? Yes; extra pay on any basis is compatible with the exemption if the weekly guarantee is met (541.604(a)). Does paying more than $684 make an employee exempt? No; the duties test must also be met (29 CFR 541.2).

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