Where do you put your direct labor on your income statement? I have been asked this question multiple times and while it doesn’t matter effectively for tax purposes, it does matter if you want to benchmark your agency against industry standards. The top industry consultants have set the standard that all labor and labor costs, including benefits should be logged to a 6000 level or expense category on your general ledger. If you currently have all of your direct/billable labor in your COGS section this will dramatically change the look of your financial statements, however it will not change the bottom line of your net income.

We are only moving numbers, not changing numbers.

What will change is your ability to use financial benchmarks that have been developed by some of the top consultants, including David Baker at Recourses. These financial benchmarks include appropriate salary specifically for agencies/service companies, ie how much should you be paying in total gross wages to all employees based on how much agency gross income you have ratios (Gross Payroll / Agency Gross Income). If you were to base this ratio off of total revenue vs AGI you would be including all of the outside expenses that you spend to get a job done (not talking labor here). For many agencies that keep everything in house, the agency gross profit and revenue numbers will be very close. For many full service agencies that outsource lots of jobs like printing and mail-house production, the agency gross income and revenue can be significantly different. You would not want to apply the industry benchmarks to revenue, as in many cases you would be likely to get a false sense of security.

If you still want to see your direct/billable costs, the compromise is to separate direct/billable wages and indirect/admin wages at the expense level. This is a significant amount of work for whoever is entering your payroll as to do this properly, you will need to break up gross wages, payroll taxes & benefits by direct and indirect categories. This can make payroll entry a bit gruesome, but once you have it figured out it works just fine.

If you have the Workamajig platform with the setting properly deployed many of these benchmarks, including salary load will auto populate for you. Keep in mind, if you have your direct labor in your COGS section in Workamajig the results you read will be incorrect.