Payroll liabilities refer to the amount of money a company owes but has not paid to its employees for wages, salaries, and other forms of compensation, such as bonuses, commissions, and vacation pay. Payroll liabilities also include taxes and other deductions the company must withhold from an employee’s pay, such as social insurance contributions and benefits to which an employee is entitled.
What are the types of payroll liabilities?
Employee compensation
Gross wages owed to employees – including bonuses and other incentive compensation – are considered a current liability, which means that they are typically due within a short period of time, usually within the same month.
Tax withholdings
Employers must withhold certain taxes from their employees’ wages, such as federal, state, and local taxes. The employer is responsible for remitting these withheld funds to the government on behalf of the employee.
Social insurance contributions
Social insurance contributions are payments made by employees and employers to fund government-administered social insurance programs such as healthcare. These contributions are withheld from an employee’s payroll payments, and it’s the employer’s responsibility to remit them to the government.
Employee benefits
Some employee benefits, such as paid time off, voluntary deductions, and sick pay, are considered earned wages owed to employees and are therefore considered liabilities. Other benefits, such as health insurance and retirement plans, are also considered liabilities as companies have to withhold them from an employee’s wages and transfer them to the relevant parties.
Employee wages
Employee wages are a type of payroll liability. When employers run payroll, they carry out processes to pay employees, and the wages are a type of liability employers owe. Employees are paid for their work during a certain pay period, whether weekly, biweekly, semimonthly, or monthly. Any work employees perform but haven’t been paid for yet is considered a liability.
PTO
Although employees may not take time off every pay period, employers are liable for covering paid time off expenses whenever workers use the benefit. Employers are also liable for tracking how much time off employees accrue and passing that knowledge on to them.
Payroll taxes
Usually, employers must withhold money from employee paychecks to remit to the tax collection agency. Payroll tax liabilities include:
- Income taxes
- Social security
- Medicare tax
- Benefits contributions
- Federal income tax
- State income tax
Employers must also contribute their share of payroll taxes to tax agencies and third-party benefits providers. During the payroll process, HR or finance team members gather employee wages and benefits taxes and add their share. Employers then keep the funds until the deposit date. Employers do not immediately deposit these with the taxing authority but on the date specified by the local authority.
Worker compensation insurance
Depending on state laws, businesses may need to purchase workers’ compensation insurance. If a worker gets injured on the job, the insurance policy covers medical costs and lost wages due to injury. The employer pays workers’ compensation premiums, an amount that depends on the industry and the number of employees.
Wage garnishment
Wage garnishments are court-ordered procedures that require an employer to withhold a portion of an employee’s earnings to pay off a debt. Some examples of debts include: Child support, unpaid taxes, unpaid court fines, and student loans.
How are payroll liabilities calculated?
The process of calculating payroll liabilities typically involves the following steps:
- Determining the gross pay for each employee.
- Calculating the payroll taxes
- Calculating social insurance contributions and employee benefits
- Adding up all the liabilities.
Once the individual payroll liabilities for each employee have been calculated, they should be added up to determine the total payroll liabilities for the entire payroll period.
How do employers pay their payroll liabilities?
Net pay
Federal taxes
State and local taxes
Difference between payroll liabilities and payroll expenses
Payroll liabilities and payroll expenses are related but different concepts. Payroll liabilities are amounts that an employer owes to employees or government agencies as a result of their payroll. These are recorded as liabilities on the balance sheet until they are remitted to the government or paid to the employees.
Payroll expenses, on the other hand, are the costs that an employer incurs in order to pay its employees. These include the cost of wages and salaries, payroll taxes, and other employee benefits such as health insurance and retirement plans. Payroll expenses are considered as costs of doing business and are usually recorded as expenses in the financial statements.
How to track payroll liabilities
Tracking payroll liabilities can come down to knowing the relevant deadlines. Here are a few ways to stay on top of them:
- Use a reliable payroll solution. Payroll software automatically calculates wages and taxes, as well as completing payroll each month. A payroll solution can also distinguish payroll and regular funds.
- Keep copies of all payroll documents. The business can check the dates to know when they incurred liabilities and when they’re due, setting reminders to meet deadlines.
- Use a payroll network. A payroll network records liabilities, including wages and taxes. It also shows whether a business paid liabilities or not.
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