What is ‘Wage Expense’
In financial accounting, wage expense represents payments made to non-manufacturing employees, regardless of whether they are hourly or salaried. Depending on the presentation, this line item may also include payroll tax expenses and other benefits paid to employees. Wage expense is recorded as a line item in the expense portion of the income statement.
Explaining ‘Wage Expense’
Under the accrual method of accounting, wage expenses are recorded based on when the work was performed. By contrast, under the cash method of accounting, wage expenses are recorded at the time cash is paid to employees.
Salaries and wages paid to manufacturing employees are not recorded as wage expense. Instead, they are allocated as part of the cost of the goods manufactured. Initially, the wages and salaries are included in inventory line on the balance sheet. Once inventory is sold, the allocated costs become part of the cost of goods sold (COGS) line item on the income statement.
Calculating Wage Expense
Businesses must accurately record all salary payments made to employees so they can calculate their total wage expense at the end of each accounting period.
To do this, businesses should keep detailed records of all payments made to employees during the year including salaries, overtime pay, vacation pay or other special payments like bonuses or commissions. These records should include both gross wages paid out as well as any taxes deducted from those wages before payment was issued.
Once those figures are recorded accurately and added together, businesses can calculate their total wage expenses for that period with relative ease.
Payroll Taxes & Wage Expense
In addition to calculating total wages paid for each accounting period, businesses must also factor in payroll taxes when calculating their total wage expenses for that period. When an employee receives his/her paycheck there are certain taxes withheld such as federal income tax and social security tax (FICA).
These payroll taxes are sent to the government by employers on behalf of their employees but they still count towards the employer’s overall wage expenses since they are an expense incurred due to employment costs at that business. Employers must calculate these taxes carefully in order to ensure accurate reporting at year end since incorrect calculations could lead to costly fines or penalties from government agencies or other governing bodies.
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