Is payroll considered an expense?
Payroll is an operating expense that includes all employee compensation and related taxes. It’s fully deductible as a business cost and essential for measuring labor and operating efficiency.
What is payroll in accounting?
Payroll expenses encompass all employee-related costs incurred during a given accounting period. This includes not only direct compensation but also associated employer costs, such as Social Security and Medicare contributions, health insurance, and retirement plan matches. Payroll reflects both the company’s labor costs and its compliance with employment tax obligations.
How to categorize payroll expenses
- Record payroll under Operating Expenses on your income statement.
- Use specific accounts like “Salaries and Wages,” “Payroll Taxes,” “Employee Benefits,” or “Commissions.”
- For production employees, categorize wages as Direct Labor under Cost of Goods Sold (COGS).
- For administrative or support staff, classify payroll under Administrative or Overhead Expenses.
- Accrue payroll expenses at period-end to match the cost of labor to the period it was earned, not necessarily when paid.
Examples of payroll expenses
- Employee wages and hourly pay.
- Salaries for full-time and part-time staff.
- Commissions and performance bonuses.
- Employer-paid payroll taxes (Social Security, Medicare, unemployment).
- Health, dental, and vision insurance premiums.
- Retirement plan contributions (401(k) matches).
- Paid leave and holiday pay.
Tax implications for payroll expenses
- Payroll expenses are fully tax-deductible as ordinary and necessary business costs.
- Employers must withhold and remit income, Social Security, and Medicare taxes on behalf of employees.
- Employer payroll taxes (the business’s share of FICA, FUTA, etc.) are deductible expenses.
- Payments to independent contractors are not payroll; instead, they’re classified as contractor expenses and reported on Form 1099-NEC, not through payroll.
- Accurate payroll records and filings are essential for compliance and deduction substantiation.
