Salaries expense is the amount of salary compensation that employees have earned during an accounting period, as recorded by their employer. It is reported on the income statement and, under the accrual basis, includes salaries earned but not yet paid at the period end. The amount recorded is the gross salary, before deductions for income tax withholding, employee Social Security and Medicare taxes, retirement contributions and benefit premiums.
Salaries are fixed amounts paid per year or per month, typically to managerial, professional and administrative staff who are often classified as exempt employees under US overtime law. Wages, by contrast, are usually paid per hour or per unit of output. Many businesses keep separate accounts for salaries expense and wages expense, while others combine them in one line such as salaries and wages expense.
Where salaries expense appears
Salaries are classified according to the function the employee performs. Office, finance and executive salaries are usually reported within general and administrative expenses. Sales staff salaries go into selling expenses. Salaries of factory supervisors are part of manufacturing overhead and become part of the cost of inventory, reaching the income statement only when the goods are sold. Salaries of staff building a long-lived asset, such as software developers working on qualifying internal-use software, may be capitalized as part of that asset.
Salaries expense does not include the employer's own payroll taxes, such as its share of FICA and federal and state unemployment taxes. Those are recorded separately as employer payroll taxes. Employer-paid benefits such as health insurance and retirement contributions are also usually tracked in their own accounts as employee fringe benefits.
Journal entries
When salaries are paid in the same period they are earned, the payroll entry debits salaries expense for the gross amount and credits cash for the employees' net pay, with liabilities for each amount withheld. Those liabilities remain on the balance sheet until the employer pays them over to the tax authorities and benefit providers.
When a period ends between paydays, an adjusting entry records the salaries earned but unpaid: debit salaries expense and credit salaries payable. This follows the matching principle and ensures the period bears the full cost of the staff who worked in it. The related balance is sometimes described as accrued payroll.
Worked example
A company has an office manager on an annual salary of $78,000, paid monthly. For January, gross salary is $78,000 divided by 12, or $6,500. From this, the company withholds $780 of federal income tax, $403 of Social Security tax at 6.2 percent, $94.25 of Medicare tax at 1.45 percent and $325 for the employee's 401(k) contribution. Net pay is $6,500 minus $1,602.25, or $4,897.75.
The entry debits salaries expense $6,500, credits federal income tax withholdings payable $780, FICA taxes payable $497.25, 401(k) payable $325 and cash $4,897.75. Separately, the employer records its own matching $497.25 of FICA, plus any unemployment taxes, as payroll tax expense. The total cost of employing the manager for the month is therefore more than the $6,500 salaries expense.
Salaries are often a company's largest controllable cost, especially in services, software and finance. Analysts compare salaries and benefits with revenue, and with headcount, to judge efficiency. Under US GAAP, public companies are not required to show salaries as a separate line, since expenses may be presented by function, but they disclose executive pay in proxy statements. Share-based compensation is a form of pay recorded separately from cash salaries, and bonuses earned but unpaid at year end are accrued in the same way as salaries. The mechanics of paying staff are covered under payroll and salary disbursement, and the taxes involved under payroll taxes.