Notes

Employees are compensated for their work with money and benefits, which can sometimes be difficult to account for. Learn how salaries, wages, benefits, leave, and bonuses are all factored into accounting for payroll and taxes.
Compensation
Billy owns a company that makes screen protector sheets for phones and tablets. He has employees that work to design the best sheets possible, a factory that makes the sheets and people who sell them to the stores. That's a lot of employees!

Billy needs to make sure that all of his employees are compensated and that he still has a profit, but he's not sure how to account for employee compensation in his books. Does he just stick all their salaries in a line in his budget? What about their sick days or bonuses?

An employee's salary or wages plus benefits is his or her total compensation. Benefits might include things like sick days, a retirement account, insurance, bonuses and more.

Let's look at how Billy and other business owners can account for employee compensation, starting with payroll.

Salaries & Wages
As we've seen, Billy has a lot of employees that are doing different jobs, from design to manufacturing to marketing and sales. How does he account for each employee on his payroll?

One way to separate out employee compensation, including salary, is by grouping the employees into two groups: direct and indirect. Direct employees are involved directly in the creation of the company's product. For example, Billy has lots of people who work at his factory to make his screen protectors. The people who are on the assembly line, the ones who actually touch the product, are direct employees.

On the other hand, indirect employees support product development and manufacture indirectly. That is, they don't actually touch the end product. The engineers at Billy's company that design the screen protectors and the salespeople who sell them are indirect employees. They help support the product indirectly.

In payroll accounting, many companies choose to put the salaries or wages of the direct employees on one line and the salaries or wages of indirect employees on another. This is because, in many companies, the pay of indirect employees is filed under overhead expenses, or those that keep the business running but are not directly related to the manufacture of the product.

Benefits & Bonuses
Billy understands how to account for the salaries and wages of both direct and indirect employees at his company. But as we've seen, what shows up on their paycheck isn't the only compensation they receive. From health insurance premiums to paid vacation and sick days, there's a lot more that employees can cost Billy.

When it comes to benefits, like sick days or insurance, and bonuses, Billy will want to account for the cost of the benefit when it is earned, not when it is paid. For example, if one of Billy's employee's earns one sick day for every three months they work, he will want to account for the cost of that sick day every quarter, even if the employee doesn't take the sick day during that quarter.

The same is true of bonuses. Billy pays his salespeople a bonus of five percent of their sales every year. At the end of the year, they get a check for the amount of five percent of everything they sold. But they are selling things all year long, so Billy will want to account for that five percent for every sale that is made, all year long, not just at the end of the year when he writes the checks.

In addition to the salary and benefits that an employee receives, Billy is also responsible for certain taxes, such as the employee contributions to Social Security and Medicare, and unemployment taxes. Again, Billy will want to account for these every paycheck and include them in his accounting.

Lesson Summary
Compensation includes the wages and benefits that an employee receives for their work. When it comes to accounting for employee salaries and wages, many companies distinguish between direct employees, who are involved in the manufacture of a product, and indirect employees, who are involved in non-manufacturing support positions within the company. Indirect employee salaries are often grouped with overhead expenses when accounting. In addition, benefits, bonuses and taxes should all be accounted for when they are earned, not when they are paid out.

Vocabulary & Definitions
Compensation: Compensation is an employee's salary or wages plus benefits.

Indirect employees: Indirect employees support product development and manufacturing indirectly.

Direct employees: Direct employees are involved directly in the creation of the company's product.