Understanding Salary Payable: Definition, FAQs and More

Introduction: Defining Salary Payable

Salary payable is an account listed on a company’s financial statements that represents the wages earned by employees during each pay period but not yet paid out. Also referred to as wages payable, salary payable is a liability account reflecting the amount of money a company owes to its employees for work done.

Salary payable is an important financial metric used by companies to track the amount of unpaid wages they owe their employees. It is also one of the critical components of employee compensation that every worker looks forward to receiving.

In this article, we’ll cover the definition of Salary Payable, highlight its importance, and answer some of the most commonly asked questions regarding this financial metric.

Why is Salary Payable Important?

Salary payable is a crucial metric for both employers and employees for numerous reasons. Here are some reasons why salary payable is important:

Employers

• Tracking salary payable helps companies keep an accurate and up-to-date record of employee wages, which helps in budgeting and forecasting future business expenses.
• A salary payable account helps ensure that employee compensation expenses match revenues, facilitating financial planning and budgeting.
• Failure to accurately track salaries payable can lead to overpayment, underpayment, or unpaid wages, leading to employee dissatisfaction and possible legal issues.

Employees

• The salary payable account reflects the amount of money owed to employees for work done, which motivates them to continue working hard.
• Salary payable accounts serve as a basis for evaluating employee performance, giving employees a clearer understanding of the proportion of their compensation that’s based on output.

How is Salary Payable Calculated?

The calculation of salary payable is relatively easy and straightforward. Here’s how it’s done:

Salary payable = Gross Salary – Deductions – Taxes

When calculating salary payable, the first step is to determine the employee’s gross salary. This figure represents the total amount of money earned by an employee before taxes and deductions. The next step is to calculate the total deductions. These may include deductions for health insurance, 401(k) contributions, or other employee benefits. Finally, the total amount of taxes owed for the period is calculated, and the resultant figure is subtracted from the gross salary to determine the amount of salary payable.

What is the Difference Between Salary Payable and Salary Expense?

While salary payable and salary expense sound similar, they are two distinct financial metrics. Salary expense is the amount of money a company expends on employee salaries during a specific period, whether or not the payment has been made. This account is recorded as an expense in a company’s income statement. In contrast, salary payable represents the amounts of employee salaries that have not been paid but are still owed to the employees.

What is the Difference Between Salary Payable and Wages Payable?

Wages payable, also known as wages payable and accrued wages, is similar to salary payable in that it represents the amount of money owed to employees. However, a significant difference between the two is that wages payable applies only to hourly employees, as it includes their hourly rates and the number of hours worked. In contrast, salary payable applies only to salaried employees and includes all fixed compensation, including regular pay, non-discretionary bonuses, and other earnings.

How is Salary Payable Recorded in the Books?

Salary payable is recorded under the current liabilities section of a company’s balance sheet. Liabilities in this section are accounts payable within a year, such as taxes and payables. Due to the short-term nature of the salary payable account, it is listed under the current liabilities section. When salaries payable are paid out, the account’s balance is reduced, and the transaction is recorded as cash outflow in the company’s cash flow statement.

How Does Salary Payable Affect Taxes?

Salary payable directly affects taxes, as it is considered a deductible expense, which reduces a company’s taxable income. Income tax is only paid on the profit realized by a company after all of its expense deductions have been made. Therefore, if a company has $100,000 in revenue but $10,000 in salary payable, only $90,000 in revenue is taxable. This is beneficial to the company as it reduces its tax expenses.

What Are the Consequences of Not Paying Salary Payable?

Failing to pay salary payable to employees can have severe consequences for a company. Here are some of the possible consequences:

• Legal repercussions: Failure to deal with Salary Payable can attract lawsuits and legal action. Employees may take legal action against a company for not paying them as per the agreed terms and conditions.
• Employee retention challenges: Employees may tend to leave a company that fails to pay their salaries on time. This can lead to high employee turnover rates and difficulty sourcing new talent.
• Affects the company’s reputation: Employees talk among themselves, and failure to pay salaries on time can negatively impact a company’s reputation, making it hard to attract top talent.

Conclusion

In summary, Salary payable, also known as wages payable, is a critical financial metric that must be accurately recorded and monitored. Companies and employees must be aware of the consequences of not paying salaries on time. Properly recording salaries payable can help businesses grow, attract and retain employees, and avoid legal and reputational issues. It is essential to monitor this account to avoid any issues that may arise and keep accurate financial records.

References

1. Koller, T., Dobbs, R., & Huyett, J. (2017). “The world at work: Jobs, pay, and skills for 3.5 billion people”. McKinsey Global Institute.

2. Richards, A. (2016). Salary payable account. Investopedia.

3. Armstrong, M. (2021). Armstrong’s Handbook of Human Resource Management Practice. Kogan Page Publishers.