Payroll costs are the costs that companies incur to pay employees’ hourly wages.
The payroll expense item may also include payroll taxes and employee benefits.
Labor costs are variable costs and are recognized in the income statement.
Under accrual accounting, payroll costs are recognized at the time the work is done, not at the time it is paid. In cash accounting, payroll expenses are recognized only when the employee is paid wages.
Payroll expenses that have not yet been paid are shown as payable on the balance sheet, which is a liability account.
Payroll expenses differ from payroll expenses in that they are annual rather than hourly. Payroll costs may be related to overtime work, while paid work does not include overtime pay.