What are payroll expenses?

Payroll expenses are the costs incurred by a company when employing workers, including the compensation paid to employees, plus all taxes and other labor costs for which the employer is responsible. In the United States, these expenses generally consist of the employee's gross earnings, plus the employer's share of Medicare and FICA (Social Security) taxes, other state or federal taxes, and the costs of any additional benefits provided in connection with employment with the company.

Payroll and payroll expenses, then, are not the same thing. An employer's payroll is the gross amount of compensation paid to all employees, but US payroll expenses are typically at least 10% - 15% higher due to the inclusion of payroll taxes. payment and other additional legal benefits such as unemployment insurance and disability insurance. Statutory bands are accounted for as payroll expenses only when paid by the employer and are not deducted from the employee's compensation.

Additional benefits, such as health and life insurance premiums, are properly considered part of payroll expenses because they are provided solely on an employment basis. However, the equipment needed to perform the work is not considered a payroll expense as it is a necessary item to perform the work. A mechanic, for example, needs tools and safety equipment, but not health or life insurance, to do his job. Many employers generally provide additional benefits, such as health or life insurance, or tuition reimbursement, to all full-time employees as part of the total compensation package, and the cost to the employer of such incentives is properly classified as a working expense. payroll.

Payroll expenses are often one of the biggest categories of expenses that a company will incur, making it imperative that they are properly classified so that the employer always has an accurate idea of ​​the true cost of hiring people. Grouping these expenses together on a balance sheet also gives management an accurate idea of ​​what percentage of company expenses are employment-related and how that affects profitability.

Payroll expenses that have been incurred but not yet paid are called accrued payroll expenses and are reported as a liability. There are two main components to this figure. First, paid vacation that employees have accrued but not yet used, which is a liability that the employer must meet at some point in the future. The second is the amount of compensation received but not yet paid, such as when the end of the financial reporting period falls within a payroll period, or the payment for a period that falls within the reporting period is not paid until some time.

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