Wage Expense: The Cost to Pay Hourly Employees

What Is a Wage Expense?

A wage expense is the cost incurred by companies to pay hourly employees. This line item may also include payroll taxes and benefits paid to employees. A wage expense may be recorded as a line item in the expense portion of the income statement. This is a type of variable cost.

Understanding Wage Expenses

Wage expenses are sometimes reported by department and they are most likely to be reported separately for the production department. This department is often the one with the most hourly employees. On the other hand, wage expenses for production workers may be incorporated 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. Business days vary from month to month and may be affected by the number of holidays during the period.  

Also, wage expenses during the Christmas/holiday season may be higher as companies hire more workers to meet the increased demand for shopping. After the holiday season, companies then may cut back on the number of workers when business is not as busy and the need for additional workers has gone.

Accounting for Wage Expenses

Under the accrual method of accounting, wage expenses are recorded based on when the work was performed. In contrast, under the cash method of accounting, wage expenses are recorded at the time the payments are made.

Wages payable is the line item that identifies how much in wages are owed to workers but have not yet been paid. It is a liability account. 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, which is reflected in the wages payable account. A wage expense is an expense account that appears on the income statement while the wages payable account is a liability account that appears on the balance sheet.

Minimum Wage

A wage expense has to at least be equal to the minimum wage dictated by the federal government or the state government. The current minimum wage in the U.S. is $7.25 an hour and has not been raised since 2009. Many states have implemented minimum wages that are higher than the federal wage and employers in those states have to pay the higher state minimum wage.

Many companies pay a higher minimum wage than the federal or state minimum wage. Examples 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 refer to hourly pay. The worker is paid per hour for a set amount of hours per week. If they go over the set amount of hours, then they are usually paid overtime. Overtime pay can sometimes be higher than the regular hourly pay; sometimes 1.5x the hourly pay.

Salary refers to a set amount of payment that does not change throughout the year and is usually quoted as an annual sum rather than hourly. With salaried jobs, there is no set amount of hours an individual works, so if the person works 40 hours a week or 60 hours a week, there is no difference in pay.

Salaried jobs usually also come with better benefits, such as 401(k) plans, better health insurance, life insurance, and flexible spending accounts (FSA).