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Payroll expenses are costs incurred by an enterprise in employing workers, including compensation paid out to employees, plus all taxes and other costs of employment for which an employer is liable. 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 statutory federal or state taxes, and the costs of any other fringe benefits provided relative to employment with the enterprise.
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 statutory fringe benefits, such as unemployment insurance and disability insurance. Statutory fringes are counted as payroll expenses only when they’re paid by the employer, and not deducted from the employee’s compensation.
Fringe benefits like health and life insurance premiums are properly considered part of payroll expenses because they’re provided purely as a function of employment. Equipment necessary to perform the job, though, isn’t considered to be this type of expense because it’s a necessary element of doing the job. A mechanic, for example, requires tools and safety equipment, but not health or life insurance, to do her job. Fringe benefits such as health or life insurance, or tuition reimbursement, are generally provided by many employers 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 usually one of the largest categories of expense that an enterprise will incur, which makes it imperative that they be properly classified so that the employer always has an accurate idea of the actual cost of employing people. Grouping these expenses together on a balance sheet also provides management with an accurate idea of what percentage of the enterprise’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 is paid leave that employees have accumulated but not yet used, which is a liability the employer must meet at some point in the future. The second is the amount of compensation earned but not yet paid out, such as when the end of the financial reporting period falls within a payroll period, or the pay for a period that falls within the reporting period isn’t paid out until some point afterward.
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