What is a wage expense?
A wage expense is a cost incurred by an organization from compensating hourly employees, salaried employees, and contractors. Wage expenses vary from one pay period to another, as some months may have as few as 18 workdays, while others may have as many as 23 days due to holidays and the total number of days in a month.
Additionally, wage expenses change from season to season. For example, retailers often hire more workers during the holiday shopping season to keep up with increased demand.
For any business to operate smoothly, it’s essential to digitally track the employee compensation process. Payroll software offers employees a self-service interface to enter hours worked, update personal data, and access tax information. These services also calculate employee pay, make employee payments, and generate tax forms such as W-2s.
Types of wage expenses
The three main types of wage expenses are below:
- Time wages are based on the amount of time worked. For example, if an hourly wage is $15, an employee receives $600 for a 40-hour workweek.
- Piece wages are based on the quantity of units produced or services rendered. For example, a yoga instructor gets paid for each class or student they teach.
- Contract wages are the number of completed works under a contract. A worker with a contract wage of $100,000 per house built under a development contract would receive $1 million for every ten homes built.
Wage expense requirements
A wage expense must be equal to or greater than the minimum wage dictated by the federal or state government. As of 2021, the federal minimum wage has remained at $7.25 since 2009, although many states have implemented higher wages that employers must pay their staff.
Accounting for a wage expense
The wage expenses on an organization’s income statement may vary depending on whether they use the accrual method or cash method for accounting. The differences are explained below:
- Under the accrual method of accounting, wage expenses are recorded when the work is done.
- Under the cash method, wage expenses are recorded and recognized when the worker is paid.
Any wage expenses that are not yet paid are recorded as wages payable on the balance sheet using accounting software.
Wage expense vs. salary expense
A wage expense is a variable-rate cost that almost always refers to hourly pay for a predetermined number of hours per week. If workers go over the set amount of hours, they are paid overtime – which may be higher than the regular hourly pay.
A salary expense is a fixed-rate cost set and quoted as an annual sum versus an hourly wage. Since salaried work does not depend on the number of hours worked, employees can work 30 hours or 60 hours a week and receive the same annual pay.
Salaried jobs often include better benefits like health insurance, paid time off, and 401k plans.
Amanda Hahn-Peters
Amanda Hahn-Peters is a freelance copywriter for G2. Born and raised in Florida, she graduated from Florida State University with a concentration in Mass Media Studies. When she’s not writing, you’ll find Amanda coaching triathletes, cuddling up with a good book, or at the theater catching the latest musical.
