Wages payable is a liability that records the gross wages employees have earned for hours already worked but that the employer has not yet paid. It appears among current liabilities on the balance sheet, since it will be settled on the next payday. Wages usually refers to pay calculated by the hour, by the shift or by units produced, as distinct from fixed annual salaries, but many businesses combine the two in a single account for salaries and wages payable or accrued payroll.
The liability arises because pay periods rarely end exactly on the last day of an accounting period. Under the accrual basis of accounting, the wages earned up to the period end must be included in that period's expenses, together with the obligation to pay them.
Calculating wages payable
For hourly staff, wages payable is based on hours worked since the last pay period ended, up to the balance sheet date. The calculation must include:
- Regular hours at each employee's hourly rate.
- Overtime pay, which under the federal Fair Labor Standards Act must be at least one and a half times the regular rate for hours over 40 in a workweek for non-exempt employees, with some states adding daily overtime rules.
- Shift premiums, piece rates, commissions and bonuses earned in the period.
Because payroll records may not yet be complete when the books close, many businesses estimate the accrual from timekeeping data or from average daily payroll.
Worked example
A warehouse pays its 30 hourly workers every Friday for the week ending that day. The year ends on Wednesday, 31 December, so Monday to Wednesday of the final week have been worked but not paid. Timekeeping shows 720 regular hours at an average rate of $22, and 45 overtime hours at time and a half, $33 an hour.
Here regular hours are 720, the rate is $22 and overtime hours are 45. Regular wages are $15,840 and overtime is $1,485, for total wages payable of $17,325. The adjusting entry on 31 December debits wages expense and credits wages payable for $17,325. Many employers also accrue the related employer payroll taxes, here about $1,325 of FICA at 7.65 percent, as part of payroll taxes payable.
On Friday, 2 January, the full week's payroll is processed. The entry debits wages payable $17,325 for the accrued portion and wages expense for Thursday and Friday's wages, and credits cash for net pay and liability accounts for withholdings. Alternatively, the accrual can be reversed on 1 January so that the whole payroll is recorded in the usual way.
Presentation and controls
Wages payable is normally a small, short-lived liability, but in labor-intensive businesses such as manufacturing, retail, hospitality and construction it can be significant. It should be shown at the gross amount; amounts that will be withheld for taxes are reclassified to withholding liabilities only when payroll is actually processed. Common errors include omitting overtime, accruing the wrong number of days, double-counting by expensing the full next payroll without clearing the accrual, and confusing wages payable with amounts still owed to tax authorities.
Internal controls over wages include approval of timesheets by supervisors, separation of the people who maintain employee records from those who process pay, and review of the payroll register before payment. These help prevent fraud such as ghost employees or inflated hours.
Legal context
Late payment of wages carries legal consequences in the United States. Federal law sets the minimum wage and overtime rules, and state laws set how often wages must be paid and deadlines for final paychecks when employment ends. A growing wages payable balance relative to gross wages, or delays in paying it, can signal cash flow problems. Related employer obligations for time off are tracked separately as compensated absences, and the employer's own tax costs as employer payroll taxes.