Differentiating Payroll, Cost of Goods Sold, and Officers Salary

by Marie | Aug 7, 2014 | Bookkeeping 101, Chart of Accounts Setup & Management, Company Setup & Management, Payroll Setup & Management

I have gotten so many questions about recording owners salary accurately and allocating payroll for direct labor workers versus admin staff, I have decided to elaborate on it a bit here.

• Cost of Goods Sold includes payroll that is associated with the creation of a sale or sales. For example when an electrician employee goes to work on an electrical assignment that the company invoice for, that payroll cost should be recorded to Cost of Goods Sold otherwise called Cost of Sales. In addition, Cost of Goods Sold includes all expenses that are accumulated as a result of completing a job that leads to an income. Expenses such as raw material, items purchased for resale, cost of parts used to construct a product for resale are all Cost of Goods Sold. If an equipment is rented to aid in the process of a job that will lead to an income, it is also to be classified as Cost of Goods Sold. If an employee uses a portion of his or her day to engage in the direct creation of a product for resale and a portion to engage in administrative tasks, the portion that is related to building the product should be coded to COGS and the admin portion coded to regular payroll expense.
• Officers’ salaries should not be classified as Cost of Goods Sold, even if a sale was derived from his or her direct input. It should be allocated to payroll with an item name such as Officers Salary in order to differentiate it from other payroll items. Regular payroll, Cost of Goods Sold payroll, and Officers’ salaries payroll are each reported separately on Income tax forms. However, in order for a company to be able to pull a Profit and Loss Report for example, and get an accurate synopsis of the overall cost of sales, the amounts for Cost of Goods Sold – including the Officers’ salaries that are direct cost of sales will need to be coded to Cost of Goods Sold. Separating them with their unique item names, will allow you to generate reports that show the total of each so as to include them in their rightful places on your tax forms with ease.
• When we speak of payroll, it is usually to define payments made at regular intervals for work done by employees which includes employees’ deductions as well as employers assigned portions that must be reported and paid to various government agencies. However, for Corporations, payroll includes Officers as well as employees. Owners of Corporations are called Officers, and they are required to include themselves on their company’s payroll, as their company is viewed as a separate person or entity – legally. For Sole Proprietors, and Limited Liability Companies (LLC’s) operating as Sole Proprietors, they are free to withdraw monies and record their drawings as Owners Draw. LLC’s operating as Corporations must follow the same procedure as Corporations discussed above.

Thus, monies paid to staff involved in direct sales – Cost of Goods Sold, Officers, and administrative staff are all classified as payroll.