Yes — EBITDA does include salaries. Employee pay is treated as an ordinary operating expense, so it reduces earnings before the depreciation and amortization add-backs are applied. Only interest, taxes, depreciation, and amortization are stripped out; wages, bonuses, payroll taxes, and benefits stay in. The one place this gets more complicated is Adjusted EBITDA, where buyers and lenders sometimes normalize owner compensation or add back non-cash equity awards.
Where Salaries Sit in the EBITDA Formula
EBITDA is built from operating income:
Operating Income + Depreciation + Amortization = EBITDA
Operating income is already net of every day-to-day cost of running the business, salaries included. A simplified walkthrough:
- Revenue, minus cost of goods sold (which contains wages for workers directly producing goods or services),
- equals gross profit, minus operating expenses (which contain salaries for administrative, sales, and management staff along with rent and utilities),
- equals operating income, plus depreciation and amortization,
- equals EBITDA.
Labor gets deducted twice on the way down — once inside cost of goods sold for production staff, again inside operating expenses for everyone else. Both deductions happen before EBITDA is calculated, so the final number already reflects the full cost of the workforce.
Why Salaries Are Not Added Back
The four items EBITDA excludes share one trait: none of them are cash spent to run the business right now. Interest reflects how the company financed itself. Taxes depend on jurisdiction and structure. Depreciation and amortization are bookkeeping entries that spread the cost of long-lived assets over time without any cash leaving the company in the current period.
Salaries are the opposite. They are cash payments made in exchange for labor performed now, a direct and recurring cost of generating revenue. That is exactly what EBITDA is meant to measure. Stripping out wages would also destroy the metric’s usefulness for comparison: a company employing 5,000 people and one employing 50 would look artificially similar. Keeping salaries in the calculation preserves the real operating cost structure, including how efficiently the business uses its workforce.
Owner Compensation in Adjusted EBITDA
Standard EBITDA keeps every salary in the calculation. Adjusted EBITDA — the version buyers and lenders rely on during a sale or financing round — may modify owner-related pay. Small-business owners frequently pay themselves more or less than a hired manager would earn in the same role, and that gap distorts the earnings picture for a prospective buyer who would replace the owner with a salaried executive.
The fix is called an add-back. If an owner draws $250,000 per year but a replacement manager would cost $100,000, the $150,000 difference is added back to EBITDA. The adjusted figure shows how much cash the business would generate under normalized management costs. The reverse also applies: if an owner underpays themselves, the adjustment reduces EBITDA to reflect the true cost of filling the role.
Other common owner-related add-backs include personal expenses run through the business, such as personal vehicle use, travel, or family members on the payroll who provide little or no work. Sellers document and justify each adjustment during due diligence, and buyers scrutinize them closely because the adjusted number often drives the purchase price.
Stock-Based Compensation
Many companies pay employees, especially executives, with stock options or restricted stock units instead of or alongside cash. Under generally accepted accounting principles, the company records a compensation expense equal to the fair value of those equity awards, and that expense reduces operating income just like a cash salary would.
In Adjusted EBITDA, companies routinely add stock-based compensation back in. The rationale is that the expense is non-cash: no money leaves the company’s bank account when an employee exercises options or vests into shares. Adding it back gives investors and lenders a view of cash-generating ability that isn’t reduced by equity dilution costs.
The practice draws scrutiny from the Securities and Exchange Commission. SEC Regulation G requires any company reporting a non-GAAP measure like Adjusted EBITDA to also present the closest GAAP equivalent with equal or greater prominence and to provide a full reconciliation showing every adjustment.1eCFR. 17 CFR Part 244 – Regulation G If a company characterizes a recurring adjustment as non-recurring, it may be deemed misleading.2U.S. Securities and Exchange Commission. Conditions for Use of Non-GAAP Financial Measures Because stock-based compensation shows up every year at most public companies, the SEC expects clear disclosure of why management believes the add-back is useful to investors.
Capitalized Labor: When Wages Skip Operating Expenses
Not every dollar of pay hits the income statement as an operating expense. When employees spend time building a long-lived asset — constructing a building, developing internal-use software, or engineering a new production line — their wages may be capitalized. The cost lands on the balance sheet as part of the asset’s value rather than flowing through salary expense in the current period.
The EBITDA effect is subtle. Because the wages never appear as an operating expense, they do not reduce operating income in the year the work was performed. They enter the income statement later through depreciation or amortization as the asset is used. Since EBITDA adds depreciation and amortization back, the cost of that labor is effectively excluded from EBITDA entirely, both when the work happens and when the asset depreciates.
Software companies show this clearly. Under accounting rules for internal-use software, salaries for developers building the product during the application development phase are capitalized, while salaries for developers doing maintenance after launch are expensed. Two developers earning identical pay can have opposite effects on EBITDA depending on the project stage. Investors comparing software companies should check how much labor each one capitalizes, since aggressive capitalization inflates EBITDA by keeping real cash costs off the operating expense line.
Payroll Taxes and Employee Benefits
The cost of employing someone extends well beyond the salary itself, and every one of these attached costs also sits inside EBITDA. Employers pay Social Security tax at 6.2% of each employee’s wages up to $184,500 for 2026,3Internal Revenue Service. 2026 Publication 9264Social Security Administration. Contribution and Benefit Base Medicare tax at 1.45% of all wages with no cap,5Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax6Internal Revenue Service. Publication 15-A (2026) Employers Supplemental Tax Guide State unemployment insurance rates and wage bases vary, with taxable wage bases running from $7,000 to over $60,000 depending on the state. Workers’ compensation premiums vary widely by industry and state.
Employer-sponsored benefits — health insurance premiums, retirement-plan contributions, and similar perks — land on the income statement as operating expenses too. Employer matching contributions to plans like 401(k)s are deductible up to 25% of total compensation paid to eligible participants during the year.7Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits All of these costs reduce operating income, and therefore EBITDA, right alongside the base wages themselves.