Payroll liabilities are commonplace in day-to-day business. Whether you're responsible for a team of employees, paying for a payroll service, or facing IRS penalties, it's easy to get overwhelmed by the complexities of running payroll.
What are payroll liabilities? How do you track, pay and reconcile them? We'll walk you through the basics, and provide some tips to keep your payroll streamlined.
What are payroll liabilities?
Payroll liabilities are payroll-related payments that you are required to pay for your business. These liabilities include employee-earned wages that your workers haven't yet received, employee taxes and payroll service costs.
Payroll liabilities are present in every payroll you run. However, most companies pay their payroll responsibilities quickly.
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What are the types of payroll liabilities?
It is important to know your specific payroll liabilities. Running payroll reports and analyzing them each month will help you create an accurate budget, understand your labor costs and manage your small business's cash flow.
While liabilities will vary from business to business, we'll examine the most common payroll liabilities you're likely to encounter.
Employee wages
Employees are an integral part of your business. To reduce employee turnover, you need to pay them real wages in a timely manner.
Wages compensate employees for work they've accomplished during a pay period. You'll determine how often to run payroll; these pay periods can be daily, weekly, biweekly or bimonthly. Before running payroll, all unpaid employee wages are liabilities because you still owe that money.
Payroll taxes
Another integral payroll obligation is payroll tax withholdings. Filing payroll taxes is mandatory for all employers, and you must contribute these taxes for every worker you hire.
Here is a breakdown of payroll taxes, including the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA):
- Federal income tax
- State income tax
- Local income tax
- Social Security and Medicare tax (FICA)
- Federal unemployment taxes (FUTA)
- State unemployment taxes (SUTA)
- Other state-specific taxes
All employees are required to complete IRS Form W-4. When your employee fills out a W-4, it helps you determine the employee's withholding allowances. The worker's gross wages are also a factor in tax contributions.
Generally, payroll taxes are paid quarterly. However, since payroll taxes aren't immediately sent to the IRS, state or local agencies, they are considered liabilities until deposited.
Payroll service costs
All businesses that invest in the best payroll software or one of the top professional employer organizations (PEOs) will have liabilities in payroll service costs.
When working with payroll software, you may pay your service costs at the end of every month or the beginning of the following month, similar to a credit card or utility bill. PEO costs may have monthly or yearly contract fees.
Payroll companies have various pricing structures. Therefore, it's best to compare payroll software costs before signing up, as one pricing structure may be less expensive than another.
Here are the six payroll software pricing structures:
- Base fee: This is a monthly charge or per-payroll fee.
- Per-employee fee: The vendor charges for each employee enrolled in the service.
- Monthly fee: This means there is a fixed price for unlimited employees.
- Set fee: This fee is based on automated software in which the employer does most of the data entry and monitoring.
- Custom quote: This is an a la carte option for companies that need personalized software to fit their needs.
- License fee: A company pays this for business software or for an add-on to existing software. The license fee can be a one-time fee or a term contract.
Other payroll costs
Depending on what benefits you provide for your employees and what financial liabilities your employees currently have, you have to account for several other payroll liabilities.
Here are some payroll costs to consider:
- Health insurance benefits
- Retirement fund contributions
- Wage garnishments
- Company stock purchases
- Savings account deposits
- Loan payments
- Union dues
- Contributions to charity
- Alimony
All contributions and withholdings are payroll liabilities until you transfer money to the correct agencies.
Payroll liabilities vs. payroll expenses
The terms "payroll liability" and "payroll expense" sound similar, but they have some key differences.
- Payroll liabilities: The amount of money in a liability account shows the amount deducted from employee paychecks or the amount you still owe. Payroll liabilities have specific dollar amounts, dates and agencies to which you must send the money.
- Payroll expenses: This is the total payroll amount for the specified pay period.
Payroll liabilities include tax withholdings, benefit deductions, retirement contributions and union dues. You'll need to calculate each liability accurately and send it to the proper authority. After you take all payroll deductions from your employee's gross pay, the funds they receive are their net pay. Net pay is the actual dollar amount your employee receives for work completed in cash, check or direct deposit.
Expenses consist of payroll expenses and payroll taxes. Payroll expenses equal the sum of the gross pay of all of your employees for a pay period. Payroll tax expenses show the total amount of money your business owes to the IRS.
How to pay your liabilities
All payroll liabilities should be paid accurately, to the correct recipients and on time. It's important not to neglect your liabilities, or your company could face some serious setbacks.
1. Pay your employees.
Pay employees wages using your employer-designated pay schedule. Employees depend on the money they receive to pay bills, purchase food and gas. Once you onboard an employee, analyze their payroll for insurance premiums, tax contributions, and garnishments.
2. Pay the IRS.
Deposit all federal tax liabilities according to your specific depositing schedule. The IRS bases your depositing schedule – either monthly or semiweekly – on your previous fourth-quarter tax period.
Most companies deposit tax liabilities using the electronic federal tax payment system (EFTPS). If you have invested in a payroll tax-filing service, that service will take care of all of your tax deadlines for you.
3. Pay the state.
State tax liabilities are similar to federal taxes in that you pay your state payroll tax using the state-specific depositing schedule.
Tracking and recording payroll liabilities
Keeping track of payroll liability deadlines can be tricky, even when you are a planner. That's why payroll software like QuickBooks, ADP, Gusto, and Paychex can help you with wage and tax calculations, deposits and storage of payroll-related documents.
However, if you complete payroll manually, you'll want to keep copies of all payroll documents. The files should have two dates: when the liabilities were received and when they are due. Set reminders so you don't miss a critical deadline.
How to adjust payroll liabilities
If your payroll liabilities don't match up, you'll need to make adjustments. Here are some common reasons for a payroll liability adjustment:
- Fixing a health insurance company contribution
- Correcting YTD employee wages, deductions or additions for someone who is no longer with the company
- Editing the amount for business contributions to a health savings account (HSA) or a 401(k) company match
How to adjust payroll liabilities will depend on if you are modifying them manually or automatically through payroll software. For example, if you are manually completing payroll, you can enter an adjustment for any liability. Conversely, if you use a payroll service, you won't adjust any payroll liabilities that the service oversees – such as federal and state tax liabilities. However, you may be able to modify local or other taxes that are not supported by your payroll service if the software or your subscription plan allows.
Here are the basic steps to complete a payroll liability adjustment using the popular accounting software QuickBooks:
- Run a Payroll Checkup.
- Run a Payroll Summary report.
- Go to the Employees menu > Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
- Select the employee or company adjustment.
- Complete the taxes and liabilities fields.
- Select Accounts Affected > OK.
- Repeat if necessary.
- Run a Payroll Summary report to confirm the changes.
Reconciling payroll liabilities
Payroll reconciliation double-checks your mathematical calculations to ensure your employees are paid accurately. To do this, compare your payroll register with the amount you are paying the staff member by cash, check, direct deposit or an alternative payment method.
Here is how you complete a payroll reconciliation:
- Check the payroll register, which includes all the payroll data.
- Gather your employee time-tracking data – including time cards and timesheets.
- Cross-check your staff pay rates – either hourly or salary.
- Confirm the deductions for each worker.
- Record wages and deductions in the general ledger.
- Submit payroll.
Here is the schedule for payroll reconciliation:
- Every pay period, at least two days before payday
- When you file your quarterly taxes with Form 941
- Once per year – January – when you compare your payroll records with your employee's W-2 form
Payroll reconciliation helps prevent disgruntled employees, avoid financial penalties and fines from the IRS, and keeps your books up to date. Payroll accounts for over two-thirds of most companies' overhead costs, so it's essential to get it right. Payroll software can streamline reconciliation and alert you to any errors.