A wage expense is the cost incurred by businesses to pay their hourly employees.
On the books, the wage expenses line item may also include expenses such as payroll taxes and employee benefits. This type of expense is usually listed among the variable costs in the income statement.
Key Takeaways
- Wage expenses are variable costs and are recorded on the income statement.
- Under the accrual method of accounting, wage expenses are recorded when the work is performed rather than when the worker is paid. Under cash accounting, wage expenses are reported only when the worker is paid.
- Wage expenses that are not yet paid are recorded as wages payable on the balance sheet, which is a liability account.
- Salary expenses differ from wage expenses as they are quoted as an annual cost rather than an hourly one. Wage expenses may include overtime pay, whereas salaried jobs do not.
Understanding Wage Expenses
Wage expenses are sometimes reported for each department. This is typically the case within production departments that commonly employ the highest number of hourly workers. Alternatively, wage expenses for production workers may be added into the cost of goods sold (COGS) item on the income statement.
Wage expenses fluctuate from one period to the next, dictated by the number of business days and the volume of overtime to be compensated.
For numerous businesses, wage expenses surge during the winter holiday season due to increased product demand. Post-holiday, companies might reduce their workforce as sales volume recedes.
Accounting for Wage Expenses
Under the accrual method of accounting, wage expenses are documented based on when the work was performed. With the cash method of accounting, these expenses are recorded at the time payments are made.
Wages payable is the line item recording money owed to employees that hasn’t yet been disbursed. It’s a liability account. When a wage expense is recorded, it’s a debit to the wage expenses account, necessitating a credit to the wages payable account for the same amount until the wage is paid to the worker.
Traditionally, wages are paid in the pay period following the one during which the work was done. Thus, a delay will always be reflected in the wages payable account. Wage expenses appear on the income statement, while the wages payable account is a liability on the balance sheet.
Minimum Wage Compliance
A wage expense must at least match the minimum wage mandated by the federal or state government. As of now, the federal minimum wage in the U.S. stands at $7.25 per hour, unchanged since 2009.
Numerous states have enacted minimum wages higher than the federal level, and employers must adhere to the higher state wage where applicable. Additionally, many companies such as Walmart, Kroger, Target, Costco, and Amazon, voluntarily pay wages higher than the federal or state minimum.
State Minimum Wages
Thirty states, alongside the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands have implemented minimum wages that surpass the federal minimum wage. On Jan. 1, 2024, twenty-two states increased their minimum wages.
Wage Expense vs. Salary Expense
Despite often being used interchangeably, ‘wage’ and ‘salary’ refer to different types of employment payments.
Wages generally denote hourly pay. Workers receive compensation per hour for a specified number of hours each week. Should they exceed this set amount, they usually obtain overtime pay, which is typically 1.5 times the regular hourly wage.
On the other hand, a salary refers to a fixed payment quoted annually, not hourly. There’s no strict weekly hour requirement, and overtime pay is seldom accorded. Salaried roles often come with superior benefits such as 401(k) plans, health insurance, life insurance, and flexible spending accounts (FSA).
Are Minimum Wages Set by States or Cities?
All U.S. states can set their own minimum wage rates or adhere to the federal rate as the state’s minimum. Cities and counties might also institute rates higher than the state’s minimum.
For instance, as of Jan. 1, 2024, California’s minimum wage is $16 per hour. However, numerous cities and counties within the state maintain even higher rates.
What Is a Decent Hourly Wage Today?
ZipRecruiter’s
Related Terms: income statement, payroll taxes, variable cost, salary expenses, minimum wage.
References
- U.S. Department of Labor. “State Minimum Wage Laws”.
- Economic Policy Institute. “Minimum Wage Tracker”.
- Business Insider. “Retail Giants Like Walmart, Amazon, and Kroger Are Firing Shots Over Rivals’ Minimum Wages. Here’s Who Actually Pays $15 an Hour”.
- Economic Policy Institute. “Twenty-two states will increase their minimum wages on January 1, raising pay for nearly 10 million workers”.
- U.S. Department of Labor. “Consolidated Minimum Wage Table”.
- UC Berkeley Labor Center. “Inventory of US City and County Minimum Wage Ordinances”.
- ZipRecruiter. “Decent Salary”.
- U.S. Bureau of Labor Statistics. “Usual Weekly Earnings of Wage and Salary Workers Third Quarter 2023”.
