Wage Expense: The Cost to Pay Hourly Employees

What Is a Wage Expense?

A wage expense is a type of variable cost incurred by businesses to pay their hourly employees. It may be recorded as a line item in the expense portion of the income statement. As a matter of record-keeping, the wage expenses line item may also include the expenses of payroll taxes and employee benefits.

Understanding Wage Expenses

Wage expenses are sometimes reported for each department. This is usually the case when there is a production department, which often has the most hourly employees.

As an alternative, wage expenses for production workers may be added into the cost of goods sold (COGS) item on the income statement. Wage expenses vary from one period to the next, depending on the number of business days in the period and the amount of overtime to be paid.

For many businesses, wage expenses increase during the winter holiday season in response to higher demand for their products. After the holiday season, companies may cut back on the number of workers as sales slow.

Accounting for Wage Expenses

Under the accrual method of accounting, wage expenses are recorded based on when the work was performed. Under the cash method of accounting, wage expenses are recorded at the time the payments are made. Wages payable is the line item that records how much money is owed to workers but not yet paid. When a wage expense is recorded it is a debit to the wage expenses account, which requires a credit to the wages payable account for the same amount until the wage is paid to the worker.

Wages are typically paid to a worker in the pay period following the period in which the work was performed, so there is always a delay that must be reflected in the wages payable account. A wage expense is listed on the income statement while the wages payable account is a liability account on the balance sheet.

Minimum Wage

At the least, a wage expense has to be equal to the federal government's or applicable state government's minimum wage. The current federal minimum wage is $7.25 an hour and has not been raised since 2009.

Many states have implemented minimum wages that are higher than the federal minimum wage and employers in those states have to pay the higher state minimum wage. Many companies choose to pay a higher minimum wage than the federal or state minimum wage. They include Walmart, Kroger, Target, Costco, and Amazon.

Wage Expense vs. Salary Expense

Wage and salary are often used interchangeably but they refer to different types of payments for employment. Wages most often mean hourly pay. The worker is paid per hour for a set number of hours per week. If they go over the set amount of hours, they are usually paid overtime. Overtime pay is typically higher than regular hourly pay; often it's 1.5x the hourly pay.

Salary refers to a set payment and is usually quoted as an annual sum rather than an hourly wage. There is no strict number of hours per week that the individual works, and overtime is rarely paid. Salaried jobs usually also come with better benefits such as 401(k) plans, health insurance, life insurance, and flexible spending accounts (FSAs).Source