Wage Expense

Wage expense is the cost a business incurs to pay hourly employees. It appears on the income statement and often includes related payroll taxes and employee benefits. Because wages are tied to hours worked, they are generally treated as variable costs that fluctuate with labor demand and seasonality.

Key takeaways

• Wage expense is a variable cost recorded on the income statement; unpaid wages appear as wages payable (a liability) on the balance sheet.
• Under accrual accounting, wages are recorded when work is performed; under cash accounting, when wages are paid.
• Wages are typically hourly and may include overtime; salaries are usually annual and do not typically include overtime.
• Employers must pay at least the applicable federal, state, or local minimum wage; many employers and jurisdictions set higher rates.

What counts as wage expense

Wage expense covers payments to hourly workers for time worked, including:
* Regular hourly pay
Overtime pay (usually a higher rate, commonly 1.5× hourly pay)
Employer payroll taxes and directly attributable benefits (when recorded as part of labor cost)

Companies often report wage expense by department (for example, production) or include production wages in cost of goods sold (COGS).

Accounting for wage expense

Accounting treatment depends on the method used:

Accrual accounting
* Record wage expense when the employee performs the work.
* If unpaid at period end, record a liability: debit Wage Expense, credit Wages Payable.
* When paid: debit Wages Payable, credit Cash.

Cash accounting
* Record wage expense only when payments are actually made.

Financial statement placement
* Wage Expense — income statement (operating expense or allocated to COGS).
* Wages Payable — current liability on the balance sheet until paid.

Minimum wage and geographic variation

Employers must pay the highest applicable minimum wage between federal, state, and local rates. The federal minimum wage is the legal floor, but many states, cities, and territories set higher minimums. In practice, some large employers also voluntarily pay above local minimums.

Local governments can set rates above their state levels, so the applicable minimum wage may vary by city or county within a state.

Wage vs. salary

• Wages: hourly pay; varies with hours worked; overtime typically applies; commonly used for part-time, entry-level, and production roles.
• Salary: fixed annual or periodic pay; not typically tied to hours or eligible for overtime (depending on classification); often includes more or better benefits (e.g., retirement plans, health insurance).

Typical benchmarks

• “Decent” hourly wage perceptions vary; $17/hour is often cited as a legislative target in some discussions.
• Average hourly pay differs by location; higher-cost areas typically show higher averages.
• Median weekly earnings for full-time workers are a useful broader measure of pay levels.

Conclusion

Wage expense is a core labor cost for businesses that is variable, tied to hours worked, and treated differently under accrual and cash accounting. It must meet applicable minimum-wage rules, can vary by jurisdiction and employer policy, and differs from salaried compensation both in pay structure and typical benefits.