Employee Costs

When an employee works for the entity, the cost of each hour, or other unit of time, includes not only the salary earned, but also the fringe benefits to which the employee is entitled because the employee worked that hour. The cost also includes the FICA taxes levied on the entity for that hour of work but not the employee's contribution to FICA. (FICA taxes are social security taxes.) However, the accounting required to trace these costs to individual employees is more than many entities think is worthwhile, so they lump all these together as a separate expense item, often called employee benefits.

Even though this shortcut is typically taken you should always remember that the real cost of using an employee is much more than the salary. In the typical entity, these employee taxes and fringe benefits are about 25 percent of salary.

Employees do not receive cash equal to the amount they earn. Part of their salary is withheld as an advance payment on their income taxes, and the employer sends this amount to the Internal Revenue Service. An amount is also deducted for the employees' contribution to social security. Deductions may be made for employee contributions to health plans, union dues, and pensions. The expense to the entity is what employees earn, not what they are paid.

When an employee is not paid for work performed during a month, there is an accrued liability at the end of the month. If you pay employees weekly, this liability occurs whenever the last day of the month is not the last day of a week--which typically is 10 or 11 of the 12 months in a year. Calculating the amount of accrued salary is time consuming. If you decide that the work involved in making this calculation is not worthwhile, you can record as an expense the amount earned by employees in the pay periods for which you made cash disbursements during the month.