What Are Payroll Liabilities? Everything You Need To Know

Every seasoned business owner knows that payroll isn’t just about cutting checks. It’s also about managing the (often overlooked) financial obligations that come with having a team. 

One of those obligations is payroll liabilities. These represent money you owe to different groups, such as your employees, the government, and insurance providers. Understanding and managing these liabilities is crucial for maintaining financial stability. It also helps you avoid legal troubles.

In this comprehensive guide, we’ll break down the different types of payroll liabilities. We’ll also give tips to help you stay on top of your finances.

What Are Payroll Liabilities?

When you hire employees, you take on more than just the responsibility of paying their wages. You also have to manage payroll liabilities, which are extra costs of keeping staff. They’re typically short-term obligations that you haven’t paid yet. Once you pay them, they become individual expenses.

Some of the most common payroll liabilities are unpaid wages. These are amounts of money owed but not yet paid out. But other examples include taxes, deductions, and paid time off (PTO).

Failing to manage your liabilities can lead to serious legal issues. These include penalties and fines from government agencies. These can be levied if you pay employees late or withhold the wrong amount from their paychecks. Plus, late payments can damage your reputation.

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Types of Payroll Liabilities

Let’s take a closer look at some different types of payroll liabilities:

• Employee Compensation. This is the most basic type of payroll liability. It’s the money you owe employees for the work they’ve done each pay period. Usually, this is a payroll expense, but it becomes a liability when you haven’t yet paid. 
• Payroll Taxes. The most significant payroll taxes are income and Federal Insurance Contributions Act (FICA). These cover Social Security taxes and Medicare taxes. FICA taxes are both employee tax liabilities and employer liabilities. In other words, they’re split between the employee and the employer. You cover half of this liability and withhold the other half from employees’ paychecks.
• Voluntary Deductions. These are amounts your employees choose to have withheld from their paychecks. Common deductions are health insurance premiums and retirement plan contributions.
• PTO. These liabilities are for any money you owe employees for paid vacation days or sick leave.
• Garnishments. In some cases, you may be required by law to withhold money from an employee’s paycheck to pay off a debt they owe. Creditors use court orders to mandate this action only in extreme situations.

Payroll Liabilities Versus Payroll Expenses

If you’ve come across payroll liabilities before, you’ve probably heard of payroll expenses. But are they the same thing? Is a salary expense a liability, for example?

The short answer is not quite. Payroll liabilities are amounts you owe but haven’t paid yet. Payroll expenses are amounts you’ve already paid. This distinction is important because of the way businesses track their finances. Most businesses use an accounting system called the accrual method.

Under the accrual method, you record financial transactions as they happen. This is opposed to cash-based accounting, where you record them when money changes hands. So, when you calculate your employees’ wages and withhold taxes, you record them as liabilities right away. Once you send the money, you record these amounts as expenses.

It might seem like a small difference. But it’s key to understanding your company’s financial health. By tracking your payroll liabilities and expenses separately, you get a clearer picture of your cash flow. This ensures you have enough money to meet all your obligations.

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How Does a Company Handle Payroll Liabilities?

Handling payroll liabilities requires organization and a little math. You have to collect employee data, calculate wages and withholdings, and update your records accordingly.

The most common liabilities are wages, federal income tax, and FICA taxes. Here’s a step-by-step guide for managing them:

1. Collect Employee Data. Have each employee fill out a W-4 form. This form provides information about your employees’ tax withholding preferences. These include factors like their filing status and number of dependents.
2. Calculate Gross Wages. This is the total amount an employee earns before accounting for deductions.
3. Determine Withholding Amounts and Net Pay. Use the W-4 information and tax tables to calculate how much to withhold for income, FICA, and any other payroll-related taxes. You also need to add up any voluntary deductions. Subtract these amounts from the employee’s gross wages to get their net pay.
4. Send Net Pay to Employees. Send employees their net pay using their preferred payment method.
5. Record Payroll Liabilities. Record your company’s share of FICA taxes and the amounts you withheld from employees’ paychecks. Don’t forget to include any other accrued payroll liabilities for which you’re responsible. These may include federal unemployment taxes, state unemployment taxes, or workers’ compensation insurance.
6. Remit Withheld Amounts. Send the withheld taxes and your company’s contributions to the appropriate agencies. Submit the required reports explaining what these payments are for.
7. Update Your Records. Once you’ve paid a liability, adjust your records to register it as a payroll expense.

Payroll Liabilities Example

Let’s take a look at a concrete example. Imagine you own a handyman services company with an employee named Alice. Alice’s gross wages for a week are $1,000. Based on her W-4 and the tax tables, you determine that you need to withhold $150 for federal income tax (15% of her gross wages) and $76.50 for FICA taxes (7.65% of her gross wages). This means her net pay is $773.50.

You’ll record the $150 and $76.50 as payroll liabilities, along with your company’s matching contribution of $76.50 for FICA taxes. You then pay Alice her net wages and send the withheld amounts to the appropriate agencies, along with your company’s share. You’ll also send the required reports.

Finally, update your records to show that the paid amounts are now payroll expenses rather than liabilities.

Less common types of payroll liabilities may have different payment and withholding methods. The types of liabilities you’re responsible for and the methods for paying them can also vary, depending on your location. Always check with the IRS to make sure you’re following the right steps.

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5 Pro Tips for Handling Payroll Liabilities

Here are some best practices to help you manage your payroll liabilities like a pro:

1. Keep a Payroll Reserve. Maintain a buffer in your bank account to make sure you always meet your payroll obligations. This will come in handy if you run into unexpected expenses or delays in customer payments. It also helps to make a separate bank account for payroll to avoid accidentally using the funds for other expenses.
2. Maintain Detailed Records. Keep meticulous records of your payroll liabilities and expenses. This improves financial planning and makes things easier when tax season comes around. Using accounting software makes this process a lot less time-consuming.
3. Set Deadline Reminders. Be aware of the due dates for paying payroll taxes. Set reminders to avoid missed deadlines and potential penalties.
4. Consider Outsourcing. If managing payroll becomes too complex, consider hiring a payroll service provider. It competently handles calculations, payments, and filings, so you don’t have to.
5. Stay Up-to-Date on Tax Laws. Tax laws can change over time. Stay informed about any modifications that could affect your business. Consulting with a tax professional or attending workshops can help you stay up to date.

Automate Bookkeeping by Syncing Your Joist and QuickBooks Online Accounts

Dedicated software is the best way to avoid mistakes when working with tricky financial obligations. That’s why Joist syncs with QuickBooks for easy recordkeeping.

Manage, organize, and automate your books with Joist and QuickBooks Online—the perfect combination for an easy tax season. Plus, use Joist to accept client payments and create professional invoices in just a few clicks.