How to account for unpaid wages

Unpaid wages are the earnings of employees that have not yet been paid by the employer. These wages are only accounted for if they remain unpaid at the end of a reporting period. If so, they must be recorded under the accrual basis of accounting so that the full amount of compensation expense is recognized during the reporting period. An accrual entry is not necessary if the amount of unpaid wages is immaterial; in this case, the expense is recorded when the wages are paid.

To account for unpaid wages, accumulate the number of hours worked by employees for the period after the last pay period and through the end of the reporting period. Multiply these hours worked by the wage rate for each employee to derive gross pay. It may also be necessary to derive overtime pay, shift differentials, and piece rate pay, if these types of compensation expense were also incurred by the employer. Then multiply the gross pay by all applicable tax rates, such as social security, Medicare, and unemployment taxes. Be aware that some of these taxes are capped, and so may not apply once an employee has reached a certain amount of year-to-date pay. Then create a reversing journal entry that charges these expenses to wage expense and payroll tax expense, with offsetting credits to the accrued wages payable account. Accrued wages payable is classified as a current liability, and is reported within that classification in the balance sheet. In the following accounting period, the entry automatically reverses.

Thus, the accounting for unpaid wages follows these steps:

  1. Accumulate hours worked.
  2. Multiply accumulated hours by applicable wage rates to arrive at gross pay.
  3. Multiply gross pay by the applicable tax rates.
  4. Create a reversing journal entry to record these amounts.

Also, if the amount is material, it may make sense to accrue an expense for any related benefits. For example, if employees are having amounts withheld from their pay for a 401k retirement plan and the company is matching the employee contributions, consider accruing this employer match as part of the accounting for unpaid wages.

Conversely, there is no accounting for unpaid wages under the cash basis of accounting. Wages are only recorded under the cash basis when cash is paid out to employees. This means that there may be a disparity between the amount of expense reported by a cash basis employer and the actual amount of expense incurred within a reporting period.