What Are Payroll Liabilities?

Payroll liabilities are debts related to employee compensation that your business is responsible for. Check out the five most common ones.

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When I worked an hourly job, I would always try to calculate how much I’d get in my next paycheck before I received it. It was a nice treat when my shoddy back-of-the-envelope arithmetic failed and my paycheck was larger than expected.

As an employer and the one cutting the checks, you’re responsible for keeping track of employee-related payments that you owe but haven’t yet made. The only difference is there’s more pressure to get the math right.

Liabilities are defined as financial obligations to another person, company, or government. Payroll liabilities refer to money owed to, or on behalf of, employees, including wages, payroll taxes, and contributions to health and retirement plans.

Recording payroll liabilities is part of how payroll works in accrual method businesses. It’s called a payroll accrual when you record employee-related payments that you owe but haven’t paid at the end of the accounting period, which could be a month, quarter, or year.

Payroll liabilities remain on your books until you pay whoever is owed money, whether it’s employees, tax authorities, or insurance companies. Most of the time, payroll liabilities last just a few days or weeks.

Take a look at the most common payroll liabilities.


Wages, salaries, tips, and bonuses

The highest payroll liability balance should be for employee take-home pay.

At the end of each accounting period, businesses record a liability in an account called Wages Payable or Salaries Payable. The account reflects employee net pay — compensation after payroll taxes and other deductions — that your business owes but hasn’t yet paid.

The specific name of the liability account depends on the nature of employee pay. Salaried employee compensation should go in a Salaries Payable account, and hourly employee pay goes in a Wages Payable account.

Restaurant accounting systems should have a Tips Payable account to track employee tips collected but not yet paid. If your business pays cash bonuses, you’ll need a Bonus Payable account, too.


Payroll taxes

Wherever there’s compensation, there are payroll taxes. Until your payroll software remits payroll taxes to the appropriate tax authorities, they’re liabilities for your business.

Businesses withhold a portion of employee paychecks for the following payroll taxes:

  • Federal income tax withholding
  • State and local income tax withholding
  • One-half of Federal Insurance Contributions Act (FICA) taxes
  • State Unemployment Tax Act (SUTA) taxes (only in Alaska, Pennsylvania, and New Jersey)
  • Additional Medicare taxes (for high earners)
  • Other state and local payroll taxes

Employers dip into company funds to pay employer-paid payroll tax expenses:

  • One-half of FICA taxes
  • Federal Unemployment Tax Act (FUTA) taxes
  • SUTA taxes
  • Other state and local payroll taxes

Your business should create payroll liability accounts for each type of tax. Taxes paid by both employers and employees, such as FICA taxes, require just one payroll tax liability account.


Paid time off (PTO)

At first blush, it might seem nonsensical to track employee PTO in dollars and cents. However, businesses input PTO to their accounting software to keep tabs on how much the employer might have to shell out if employees quit without using their PTO.

Say your employee Jane earns 0.05 PTO hours for every hour of work. If she works 40 hours in a pay period, she will accrue two hours of PTO (40 hours worked x 0.05 PTO rate). Therefore, you’d record a $20 liability in your PTO Liability account ($10 hourly rate x 2 hours PTO).

Businesses that don’t allow unused PTO to roll over into the new year need to reverse PTO accruals at the end of the year to show they no longer carry the obligation. Businesses with unlimited PTO policies don’t accrue PTO.


Health and retirement plan contributions

Employees often contribute to retirement and subsidized health insurance plans by using a portion of their pre-tax earnings. As an employer, you’re responsible for holding onto and passing along those payments. While the cash is technically in your hands, it’s a liability.

Most small businesses can relate to this payroll liability example: Say that your business pays its employees on the 15th and the last day of the month. You withhold $25 for health insurance premiums from each paycheck, and you use that money to pay a health insurance provider at month-end.

To reflect your obligation, your business will record a $25 Health Insurance Premiums Payable for each employee at every payroll run.

The same goes for 401(k) plans. In the time between paying employees and sending contributions to the provider for investment, your books should show a balance in its 401(k) Contributions Payable account.

Other fringe benefits that employees pay through their paychecks, such as commuting benefits, also count as payroll liabilities.


Garnishments

Courts can require employers to withhold part of an employee’s paycheck to repay outstanding debt. Wage garnishment often stems from unpaid child support.

Instead of writing a full paycheck to an employee, you write two checks — one to the employee and one to the debt collector. Set up a Garnishment Payable account for the time between the end of the pay period and when you send out the garnishment check.


Nobody likes to be paid late

Recording payroll liabilities can ensure that you don’t miss a tax or health insurance payment.

For extra assurance, set reminders to make on-time payments to your employees, the IRS, and anyone else you owe. Nobody likes to wake up on payday feeling lighter than expected, and paying a tax bill late can lead to trouble.

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