Payroll Liabilities

What Are Payroll Liabilities?

Payroll liabilities are the money owed by a company that hasn’t yet been paid as part of the normal payroll process.

For example, if you pay employees once per month, the wages they’ve earned but you haven’t yet paid out are a payroll liability. Taxes, payroll costs, and paid time off are common forms of payroll liabilities (we’ll cover all the different types of payroll liabilities in a moment).

These liabilities are all expenses that you will have to pay out in the near future, so they’re critical to track and manage carefully. They can be easy to overlook because they’re due later, but failing to anticipate and track them can mean running into big problems down the line.

Payroll liabilities also come with strict deadlines in most cases, with laws about how quickly employees must be paid in many cases, and penalties if you don’t submit employee tax withholdings on schedule. That’s why staying on top of the process is so vital.

5 Common Types of Payroll Liabilities

There are many different kinds of payroll liabilities, and it’s important to know them all so you can determine which ones apply to your company. The exact amount of your total payroll liabilities will vary depending on things such as state laws, your business setup, and the benefits you offer employees, but this is the essential overview for a typical business.

Employee Wages

This is the most typical kind of payroll liability: the wages of employees who have done work but have not been paid for it yet. It doesn’t matter if you pay employees weekly, bi-weekly, twice per month, or monthly, you’ll always have a gap between when their work is completed and when they’re paid for it. Until they’re paid, it’s a payroll liability.

This applies to everyone who does work for your business as well, not only salaried employees and hourly workers but also contractors and freelancers. However, for freelancers and contractors, you won’t owe or withhold taxes for them as they are responsible for those on their own.

Regular wages and salary aren’t the only kinds of potential payroll liabilities. If you offer employees any sort of bonus, overtime, or commission, those are also a liability that you must account for until they’re paid out.

Paid Time Off (PTO)

Paid time off is another common, but often overlooked, form of payroll liability. If an employee resigns, their PTO balance likely needs to be paid out. You need to have enough money on hand to make that payout, which represents an existing payroll liability.

Your accountant or payroll provider should be able to help you track those PTO accruals to ensure you have the cash on hand to meet those potential obligations.

Payroll Taxes

Payroll taxes are also a payroll liability: you are responsible for withholding federal income taxes based on income and filing status from an employee’s paycheck, and transmitting those payments to the IRS. Until those payments are made, they’re a liability. If your state has income tax, you may also be responsible for withholding and paying those taxes.

You’re also responsible for employer payroll taxes, and those are a payroll liability until you’ve paid those obligations. Employers are required to pay a share of every employee’s Social Security and Medicare, also known as FICA (Federal Insurance Contribution Act) for the law that made these contributions mandatory. They’re withheld from gross pay, and employees and employers both have to pay 7.65%.

And don’t forget about state and federal unemployment insurance taxes (FUTA and SUTA) as well—those will cover employees if they’re laid off, and you’re responsible for those payments. Only employers pay these taxes.

Voluntary Deductions

If you offer benefits like retirement plans, health insurance, life insurance, or any other benefits, those are voluntary deductions. The worker contribution part of these benefits is funded through payroll withholding, and so they’re a payroll liability until the contributions are paid.

The employer’s portion of insurance premiums, and retirement matching if you offer it, is a payroll expense and a liability as well.

Union dues are also considered a voluntary deduction, and so they are a payroll liability until the dues are transmitted from the employee’s post-tax pay to the union.

Payroll Service Costs

Finally, there’s a cost to running your payroll, which is also a payroll liability. Whether you use an accountant, payroll software, or a Professional Employer Organization (PEO), you will owe money for the service of handling your payroll, and until that’s paid every month, it’s a payroll liability. You’ll need to be prepared to pay these costs when they’re due.

How to Pay Your Payroll Liabilities

Now that you know what your potential payroll liabilities are, how can you ensure you’re paying them all as needed? It’s critical to stay on top of all of them, as you could end up harming an employee’s finances, or the finances and regulatory obligations of your business.

In general, the process involves seven key steps:

1. Collect employee data with form W-4.
2. Calculate gross employee wages using worker contracts, salaries, or hourly data.
3. Calculate the amount to withhold from each employee’s paycheck.
4. Withhold the appropriate amount and pay each worker’s net pay.
5. Record payroll liabilities that will be a business expense, like the employer’s share of FICA taxes.
6. Submit the proper amount to each third party (the IRS, retirement providers, insurance companies, a union, etc.) with the correct forms.
   1. Use Form 941 to report and submit FICA taxes.
   2. Use Form 940 to report and file FUTA taxes.
7. Reclassify those payroll liability balances into your payroll expense accounts.

Your payroll liabilities might change from one period to the next. For example, if you gain or lose employees, an employee is promoted, an employee changes their withholdings, or tax laws change.

When to Pay Payroll Liabilities

Because payroll liabilities are the amounts your company owes at the time of running payroll, liabilities are addressed and paid when payroll is run. But payroll liabilities are a continuous cycle: employees and contractors keep working, their benefits and taxes keep adding up, and they keep accruing paid leave every day.

As soon as your next pay period starts, you begin to accumulate those liabilities all over again.

How Do Employers Track Payroll Liabilities?

• Keep dated copies of payroll documents. The Fair Labor Standards Act (FLSA) requires that payroll records be kept in your files for at least three years as well.
• Open a separate payroll account. Having a dedicated account for payroll expenses ensures you won’t fall short when you run payroll because you’ve paid for other business expenses with those funds.
• Use payroll software. Automated payroll software provides a much smoother, more accurate payroll experience and helps you stay in compliance with the myriad regulations and rules around payroll liabilities.

How Payroll Software Minimizes Liabilities

Payroll software eliminates double entry so you end up with better data hygiene and fewer errors, and gets rid of those manual spreadsheets with an automated flow that can so easily get off track. Payroll software can also provide full-service tax filing, from local to state and federal obligations too.

Since payroll information is all stored in one place, there’s also a single source of truth to refer to if there are questions or issues that come up. With all employee payments in the same place, including irregular payments like bonuses and commissions, you can easily calculate deductions for all payments and get a comprehensive view of employee pay.

Payroll software can offer a great experience on the employee side as well. All of this information is presented to employees in an easy-to-view dashboard so they can access their pay information with just a few clicks.

Finally, payroll software can help you avoid expensive and damaging liabilities that happen when payroll liabilities are handled inaccurately. The IRS can fine you, and employees may leave you if you make mistakes in processing these liabilities. Payroll software ensures that payroll information is always up to date and accurate, giving your HR team and your employees both peace of mind.