Payroll expenses include compensation, taxes, and benefits for employees, while payroll refers only to the gross amount paid to employees. Fringe benefits, such as health insurance, are considered payroll expenses, but equipment necessary for work is not. Accrued payroll expenses, such as paid vacation and earned but unpaid compensation, are reported as liabilities. Proper categorization is important for accurate cost analysis and management decisions.
Payroll expenses are the costs incurred by a business in employing workers, including compensation paid to employees, plus all taxes and other employment 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. An employer’s payroll is the gross amount of compensation paid to all employees, but payroll expenses in the United States are generally at least 10-15% higher, due to the inclusion of payroll taxes and other benefits. additional legal benefits, such as unemployment insurance and disability insurance. Statutory fringes are counted as payroll expenses only when paid by the employer and are not deducted from the employee’s compensation.
Fringe benefits, such as health and life insurance premiums, are properly considered part of payroll expenses because they are provided solely on the basis of employment. However, the equipment necessary to perform the work is not considered this type of expense because it is an item necessary to do the work. A mechanic, for example, requires tools and safety equipment, but not health or life insurance, to do his job. Many employers generally provide fringe 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 appropriately classified as a payroll expense.
These expenses are typically one of the largest categories of expenses a business will incur, making it imperative that they be properly categorized so that the employer always has an accurate idea of the true cost of hiring people. Putting these expenses together on a balance sheet also gives management an accurate idea of what percentage of the company’s 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 of this figure. First, paid vacation that employees have accrued but not yet used, which is a responsibility the employer must meet at some point in the future. The second is the amount of compensation earned but not yet paid, such as when the end of the financial reporting period falls within a payroll period, or pay for a period that falls within the reporting period is not paid until some time. after.
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