A Responsible Employer’s Guide to Payroll Liability

Notepad with 'pay debt' written on it

Payroll liability deserves a spot in your monthly budgeting plans. It is a responsibility that every employer should fulfill, regardless of their company size.

Each payroll will amass liabilities on your part as an employer. The key is to identify these liabilities and settle them immediately so as not to carry them over to the next payroll.

But what are payroll liabilities exactly, and how do you pay them? This article will give you all the answers you need!

What Are Payroll Liabilities?

Payroll liabilities

Payroll liabilities are defined as any form of payment related to payroll that an employer or business owes, with the disbursement still pending or yet to be completed.

They can be in the form of voluntary employee deductions, benefits, wages, and payroll taxes.

Errors in employee paychecks are not to be taken lightly.A recent survey shows that around 49% of employees begin searching for another job after encountering as few as two errors in their salary.

Dutifully fulfilling all payroll liabilities aids in regulating business expenses while ensuring consistent cash flow to sustain operations and ensure all staff is given proper compensation.

Payroll Liabilities vs. Payroll Expenses

Even though they have many similarities, payroll liabilities and expenses are not the same.

Payroll liabilities are expenditures that come with employing workers to carry out a jobor perform certain tasks.

Let’s say you pay your staff bi-weekly or twice a month. You accrue payments for liabilities throughout each cutoff before the scheduled date when employee paychecks are disbursed. Once you pay your employees’ salaries, your payroll liabilities are cleared.

Meanwhile, payroll expenses comprise all the costs of operating and sustaining a business. They also encompass the salaries paid to each employee.

For example, if an employee is paid an hourly rate of $60 and is expected to complete 40 hours of work every week, they earn a total of $2,400 every week. This means that for as long as the employee’s services are hired by the company, the latter has to add the weekly $2,400 as part of their monthly expenses.

Lastly, another difference is that payroll liabilities are reflected in your balance sheet account, while payroll expenses are reported in your income statement account.

Types of Payroll Liabilities

To help you understand better what payroll liabilities are, enumerated and explained below are the different types of payroll liabilities.

#1. Employee Wages

Employee wages are the main reasons why employers need to setup payroll. They are considered liabilities while they remain unpaid. However, each company differs when it comes to the pay period at which employees work to get paid.

Pay periods may be monthly, bi-weekly, or even daily. At the same time, employee wages can either be paid hourly or receive regular salaries. Taking these into account ensures you calculate employee wages accurately.

If your employees are paid hourly, get the total hours worked for a completed pay period and multiply the total by the agreed rate per hour. At times, hourly wages may include overtime hours or any incentives your staff is entitled to.

In case your employees receive salaries, first, you need to get the sum of their annual salary. Then, determine the number of pay periods in a year. Divide your worker’s annual salary by the number of pay periods, and the result will give you the amount you have to pay in every pay period.

#2. Paid Time Off (PTO)

Paid time off (PTO) becomes a liability if employees do not use it before resigning or leaving the company. Hence, to compute for PTO, check the corresponding rates for additional hours worked. Then, get your employee’s total of overtime and multiply it by their hourly rate.

The sum is the amount you owe your employee if they leave the company without using any of their PTO.

On the other hand, if your company allows unlimited paid time off, you will not accrue any PTO as a liability.

Paid time off applies to other types of leaves, and it is your responsibility as the employer to track and record all accrued leaves of your employees.

Let’s say your employee still has 10 unused paid leaves at the end of the year. You must include the corresponding amount for all 10 unused paid leaves in your employee’s paycheck.

#3. Payroll Taxes (also called Tax Withholding)

Fulfilling payroll tax obligations is one of the most crucial liabilities for any company. Failure to fulfill any of the following taxes could lead to penalties and even dire consequences from a legal standpoint.

Payroll tax liabilities include, but are not limited to, the following:

  • Federal income tax. This is a type of tax imposed by the IRS on income or earnings in the form of wages, salaries, or capital gains. Federal income tax is charged on individuals, companies, or corporations, and other legal entities or organizations.
  • State income tax. Similar to the federal income tax, state income tax is also charged on an individual or organization’s income. The only difference is that it is the state government and not the federal government that imposes this type of tax.
  • FICA (Federal Insurance Contribution Act). This is a federal law that obligates all employers to hold two types of taxes from their employees’ paychecks. These two types of taxes are part of what is called employment taxes and are identified as Medicare taxes and Social Security taxes.
  • FUTA (Federal Unemployment Tax). This tax is covered by employers as a form of unemployment insurance. The said tax helps fund the federal government’s unemployment program, a type of financial assistance given to individuals who were unemployed but not of their own will. Typically, these are employees who were laid off either temporarily or permanently.
  • SUTA (State Unemployment Tax). Similar to FUTA, except taxes withheld under this bracket are used to fund unemployment programs for the company’s respective state only. Regulations for SUTA differ for each state.
  • Workers’ compensation insurance. Also called workers’ comp, this type of insurance helps employers cover medical expenses, missed wages, vocational rehabilitation, and death benefits.
  • Medical expenses. They cover medical treatment needed in case an employee falls ill or gets injured.
  • Missed wages. Missed wages refer to the work days wherein an injured or sick employee cannot report to or attend because they need to recover or tend to their injuries.
  • Vocational rehabilitation. It covers any ongoing treatment needed by a worker to fully recover and be able to return to work.Death benefits include funeral costs and expenses that come when an employee dies due to a work-related incident.

#4. Other Payroll Costs (Voluntary Deductions)

Aside from employee wages, PTO, and payroll taxes, these are additional costs to consider when assessing and creating your company’s payroll liability report:

  • Union dues. Union dues are regular payments of an employee to the union program or operations where they belong. Employers are required to deduct this amount from their worker’s pay and forward it to the employee’s union. A typical union due comprises about 1-2% of a worker’s gross earnings. Union dues do not come with any tax benefits since they are computed post-tax.
  • Health and life insurance premiums. Health insurance and life insurance contributions are considered part of an employer’s payroll liabilities. The remaining balance from an employee’s premium will be deducted from their gross income, or their paycheck before taxes.
  • Retirement. Retirement plans are considered payroll costs if employers provide matching contributions to help employees fund their retirement accounts.
  • Wage garnishment. Wage garnishment is the amount withheld by an employer from employee paychecks as a form of insurance or payment for any outstanding debt. Wage garnishments are usually initiated through a court order. Some of the most common situations where wage garnishment applies are when the employee has financial obligations on spousal support or alimony, child support, student loan default, or outstanding tax debt. It is also applicable when an individual files for bankruptcy.

How to Pay Payroll Liabilities

A notepad with 'plan tax' written on it where 'T' is above the letter 'A' of 'PLAN' and 'X' is below letter 'A'

Here is a simple guide you can use to pay your payroll liabilities:

  1. Make sure you have your employee’sW-4 Form. Keep all employee data organized, secured, and accessible for your HR and accounting team.
  2. Check each employee’s rates and worker contracts. Calculate their paychecks accordingly.
  3. Compute all taxes.Also, calculate the amount to be withheld from your employees’ wages.
  4. Follow your company’s payment period. Pay all wages due to your employees. Take note that the amount you pay your employees should be their net pay or the amount they get after deducting taxes.
  5. File and report all payroll liabilities to the appropriate third party. See to it that you also submit the correct forms for each type of liability or tax.
  6. Once steps 1-5 are done, you may now recategorize your payroll liabilities into your payroll expense accounts.

Now that you know the chronological order to follow when paying payroll liabilities, the next question is, “How do you send all these payments?” Check out the table below for more details:

Type of Liability

How to Pay or File

Employee wage or salary

Check or direct deposit

Federal Income Tax

Form 941


Form 941


Form 940

Medicare and Social Security Taxes

Form 941

Workers’ compensation insurance

Paid through a state program or private insurance company

How to Keep Track of Payroll Liabilities

Every business owner is bound to face inevitable changes and hurdles that may affect their finances and expenses. These changes may be caused by industry, market, or economic trends.

As such, creating and maintaining a solid system to keep track of payroll liabilities is a must. Here are some tips that will help you keep track of your payroll liabilities:

  • Keep copies of payroll for future references. This will also be helpful in determining and marking pay period and tax payment due dates in your calendar. In case there are discrepancies in your payroll, records of past payroll payments will help you track where the inconsistencies lie and resolve them promptly.
  • Set reminders to prevent missing deadlines and pay periods. You wouldn’t want to pay penalties and additional fees for any missed tax deadlines. More importantly, employees expect to be paid on the agreed payment schedule. Missing pay periods could compel employees to leave.
  • Have a cash reserve. This isto ensure you will still have enough funds to compensate employees in the event that your company faces financial hurdles. Let’s say you experience a sudden drop in sales. This would also mean less profits to cover all business expenses. A cash reserve serves as a buffer to keep workers protected from the company’s financial losses.
  • Follow all tax requirements. Some payroll taxes, such as SICA and SUTA depend on the regulations in your respective state. It is your duty as employer to check these rules and regulations with state and local authorities and ensure full compliance at all times.
  • Create a separate payroll account. A separate account is useful in making your expenses and payroll liabilities more organized. This practice prevents mismanaged funds and disputes between employers and employees.

Final Thoughts

A responsible employer regards their payroll liabilities with high priority. From itemizing and clearly defining each of their liabilities to knowing how to pay them properly and in a timely manner, it is a duty that must be taken seriously.

It is likewise essential to keep track of payroll liabilities to keep expenditures at a minimum and regulate the cash flow in the business.

Hopefully, this article has helped you get a solid grasp of payroll liabilities and shown you how to pay them!

Key Takeaways

  • Payroll liabilities are payroll-related payments and financial responsibilities that an employer or organization owes to their employees.
  • It includes employee wages, paid time off, withheld taxes, and voluntary contributions of each worker.
  • Compared to payroll liabilities, payroll expenses are considered a part of all the costs that come with running a company.
  • Payroll liabilities are reported in the employer’s balance sheet account.
  • All employers must keep a close eye on their payroll liabilities by keeping records of employee data, past payroll payments, preparing cash reserves, etc.


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