What Is a Wage Expense?
Let me tell you directly: a wage expense is a type of variable cost that businesses like yours incur to pay hourly employees. You'll see it recorded as a line item in the expense section of the income statement.
For record-keeping purposes, this wage expenses line item might also cover payroll taxes and employee benefits.
Understanding Wage Expenses
You might find wage expenses reported separately for each department, especially in production where most hourly workers are. Alternatively, for production workers, these expenses could be rolled into the cost of goods sold on the income statement.
These expenses fluctuate from period to period based on business days and overtime needs. For many businesses, they spike during the winter holiday season due to higher product demand, then drop as companies reduce staff when sales slow.
Accounting for Wage Expenses
Under the accrual method, you record wage expenses when the work is done, not when payment happens. With cash accounting, it's only when the worker gets paid.
Wages payable is the balance sheet liability that tracks unpaid wages owed. When you record a wage expense, it's a debit to the wage expenses account, matched by a credit to wages payable until payment.
Typically, wages are paid in the next pay period after the work, so there's always this delay shown in wages payable. Remember, wage expense goes on the income statement, while wages payable is a liability on the balance sheet.
Minimum Wage
At minimum, your wage expense must meet the federal or applicable state minimum wage. The federal rate is $7.25 per hour, unchanged since 2009.
Many states set higher minimums, so employers there pay that rate. Companies like Walmart, Kroger, Target, Costco, and Amazon often pay above these minimums.
Thirty states plus the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands have minimum wages above the federal level. Twenty-one states raised theirs on January 1, 2025.
Wage Expense vs. Salary Expense
People often mix up wage and salary, but they mean different payments. Wages usually refer to hourly pay for a set weekly hours, with overtime at typically 1.5 times the rate if hours exceed that.
Salary is a fixed annual amount, without strict hours per week and rarely overtime. Salaried positions often include benefits like 401(k)s, health insurance, life insurance, and flexible spending accounts.
Additional Insights on Wages
States can set their own minimum wages or use the federal one, while cities and counties might impose even higher rates. For instance, California's state minimum is $16.50 per hour as of January 1, 2025, but some local areas go higher.
A decent hourly wage? Some say $17 per hour, a goal for certain legislators, but it varies by opinion and location—California averages $26, nationwide it's $27.
The U.S. median weekly earnings for full-time workers was $1,165 in Q3 2024, up 4.2% from the prior year, per the Bureau of Labor Statistics.
The Bottom Line
In business and accounting, wages and salaries are distinct expenses. Wages are hourly and can vary seasonally with labor demand, while salaries are annual and more secure, often with superior benefits.
Key Takeaways
- Wage expenses are variable costs recorded on the income statement.
- Under accrual accounting, they're recorded when work is performed, not paid; cash accounting records on payment.
- Unpaid wages appear as wages payable on the balance sheet.
- Salaries are annual, unlike hourly wages, and wages may include overtime while salaries usually don't.
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