What are payroll liabilities?

Payroll payables are amounts owed by a company that   have not yet been paid as part of the normal payroll process.

For example, if you pay employees once a month, the wages they earned but you haven't paid yet is a payroll liability. Taxes, payroll costs, and paid vacation are common forms of payroll liabilities (we'll cover all the different types of payroll liabilities in a bit).

All of these liabilities are expenses you'll have to pay in the near future, so it's important to track and manage them carefully. It can be easy to overlook them because they're due later, but failing to anticipate and track them could mean facing bigger problems down the road.

Payroll obligations also come with strict deadlines in most cases, in many cases there are laws about how quickly employees must be paid, and there are penalties if you don't submit employee tax deductions on time. So it's important to keep track of the process.

5 Common Types of Payroll Liabilities

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

staff salary

This is the most common type of payroll liability: the wages of employees who have performed work but have not yet been paid. No matter whether you pay employees weekly, bi-weekly, bi-monthly or monthly, you will always have a lag between the time they complete their work and the time they are paid for it. Until they are paid, it is a payroll liability.

This also applies to everyone who works for your business, not just salaried employees and hourly workers but also contractors and freelancers. However, for freelancers and contractors, you don't have to pay or withhold taxes for them because they are responsible for it themselves.

Regular wages and salaries aren't the only types of potential payroll liabilities. If you pay employees any type of bonuses, overtime or commissions, those are also liabilities you must account for until they're paid.

Paid Leave (PTO)

Paid leave  is another common, but often overlooked, form of payroll liability. If an employee resigns, their PTO balance must probably be paid out. You must have sufficient funds to make that payment, which represents an ongoing payroll liability.

Your accountant or payroll provider should help you keep track of those PTO accruals to make sure you have the cash available to meet those potential obligations.

payroll taxes

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

 You are also responsible for  employer payroll taxes , and until you pay those obligations, they are a payroll liability. Employers are required to pay a portion of each employee's Social Security and Medicare, also known as FICA (Federal Insurance Contributions Act), because this law made these contributions mandatory. They are withheld from gross pay, and both employees and employers are required to pay 7.65%.

And don't forget about state and federal unemployment insurance taxes (FUTA and SUTA) either - they cover employees if they get laid off, and you're responsible for those payments. Only employers pay these taxes.

Voluntary deductions

If you offer benefits such as retirement plans, health insurance, life insurance or any other benefits   , they are voluntary deductions. The employee contribution portion of these benefits is funded through payroll withholding, and so they are a payroll liability until the contributions are paid.

The employer's share of insurance premiums, and if you offer retirement matching, is also a salary expense and liability.

Union dues are also considered voluntary deductions, and therefore they are a wage liability until the dues are transferred to the union from the employee's after-tax pay.

Payroll service cost

Finally, there is the cost of running your payroll, which is also a payroll liability. Whether you use an accountant, payroll software or a  Professional Employer Organization (PEO)  , you will have to pay money for the service of handling your payroll, and as long as it is paid each month, it is a payroll liability. You will need to be prepared to pay these costs when they are due.

How to pay your payroll obligations

Now that you know what your potential payroll liabilities are, how can you make sure you're paying them as needed? It's important to keep track of them all, because you could end up harming an employee's finances, or your business's finances and regulatory obligations.

The process generally involves seven major steps:

1.  Collect employee data with  Form W-4 .
2. Calculate gross employee pay using employee contract, salary or hourly data.
3. Calculate the amount to be withheld from each employee's pay.
4. Net salary of each employee should be given after withholding the appropriate amount.
5. Keep records of salary liabilities that would be business expenses, such as the employer's share of FICA taxes.
6. Deposit the proper amounts with the correct forms to each third party (IRS, retirement providers, insurance companies, unions, etc.).
   1.  Use  Form 941  to report and deposit  FICA taxes .
   2.  Use  Form 940  to report and file  FUTA taxes .
7. Reclassify those salary liability balances to your salary expense accounts.

Your payroll liabilities can change from one period to the next. For example, if you gain or lose employees, an employee is promoted, an employee has their withholding amount changed, or tax laws have changed.

When to pay payroll liabilities

Because payroll liabilities are amounts your company  owes at the time of  a payroll run , liabilities are settled and paid when the payroll run is over. But payroll liabilities are a continuous cycle: Employees and contractors keep working, their benefits and taxes keep accruing, and they keep accruing paid time off each day.

As soon as your next pay period begins, you start accumulating those liabilities again.

How do employers track payroll liabilities?

• Keep dated copies of payroll documents.  Payroll records must also be kept in your files for at least three years, according to  the Fair  Labor Standards Act (FLSA).
• Open a separate payroll account:  Having a dedicated account for payroll expenses ensures that you won't run out of money when you run payroll because you paid other business expenses with those funds.
• Use payroll software.  Automated payroll software  provides a much smoother, more accurate payroll experience and helps you comply with the myriad rules and regulations surrounding payroll liabilities.

How payroll software reduces liabilities

Payroll software eliminates double entry, giving you better data hygiene and fewer errors, and with automated flows gets rid of those manual spreadsheets that can so easily derail. Payroll software can also provide full-service tax filing, from local to state and federal obligations.

Since all payroll information is stored in one place, there is a single source of truth to reference if any questions or issues arise. By having all employee payments in one 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 provide 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 costly and damaging liabilities that occur when payroll liabilities are handled incorrectly. If you make mistakes in processing these liabilities, the IRS can fine you and employees can leave you. Payroll software ensures that payroll information is always up-to-date and accurate, giving both your HR team and your employees peace of mind.