What Are Payroll Liabilities?

Any payroll expenses a business owes but has yet to pay are considered payroll liabilities. These include employee wages, payroll tax, and bonuses, as well as benefits costs, such as for health and life insurance. 

These liabilities accrue with each payroll cycle until they’re paid out, after which the business is no longer liable – but then the cycle begins again. Keeping track of payroll liabilities is a fundamental aspect of business accounting, and familiarizing yourself with the various types of liabilities will help you avoid costly fines and legal penalties.

If you’re new to running payroll or just need a refresher, you’re in luck. This guide explains the most common payroll liabilities and how to pay them and provides tips to help you stay in compliance.

Types of Payroll Liabilities

Each payroll liability represents an amount of money you’re responsible for paying on a future date, so it’s critical that you have a process in place to track them. Keeping them top of mind as you’re budgeting will ensure you account for them and pay them on time. 

Employee Wages

The largest payroll liability will be how much you pay your employees each pay period. As they accrue, employee wages are liabilities until you pay them out.

Pay periods are set by an organization and are influenced by the nature of your business and the work your employees do. The most common pay periods are weekly, bi-weekly (every two weeks), semi-monthly (twice a month), and monthly. Hourly employees are typically paid weekly or bi-weekly, while salaried employees are usually paid on a monthly or semi-monthly basis. 

To calculate wages for hourly workers, multiply the number of hours worked by their hourly pay rate. Don’t forget to include overtime pay. For salaried employees, calculate their wages by dividing their annual salary by the number of pay periods in the year. This amount shouldn’t change from pay period to pay period, except when you add bonuses or other extra pay, or if the employee has been given a raise.  

Paid Time Off

Paid time off (PTO) is a payroll liability until it is paid out. The wages an employee is entitled to when they take a paid day off are usually equal to the amount they’d accrue on a standard work day. However, paid time off should be kept separate from employee wages. 

Keeping PTO liabilities in a separate account helps you track employee attendance and use of paid days off. It also makes it easy to pay out any unused PTO should an employee leave the company. If you have a policy that allows employees to rollover unused PTO into the following year, a separate account streamlines this process as well. 

Payroll Taxes

Several different payroll taxes accrue throughout the year, each with their own filing deadlines. The following payroll taxes are considered liabilities until you actually make the payment to the appropriate authority.

Income Tax

Federal income tax and state income tax should be withheld from each employee’s paycheck. The amount of federal income taxes withheld depends on an employee’s annual salary and tax filing status (single, married, etc.). An employee may also request additional withholdings, which they would likely disclose on their new hire paperwork.

States have their own rules around withholding, so it’s important to be familiar with your state’s tax laws. Some states, like Florida, Nevada, and Washington, have no income taxes at all. 

FICA

FICA taxes consist of withholdings related to Social Security tax and Medicare tax. Both Social Security tax and Medicare tax is withheld from each employee’s paycheck as one amount under FICA. The 2022 FICA tax rate is 7.65% and the taxable wage base is $147,000. As with FUTA and SUTA, employee wages above and beyond $147,000 are not subject to FICA taxes.

FUTA and SUTA

Federal unemployment taxes and state unemployment taxes are commonly referred to as FUTA and SUTA, respectively. Unlike income taxes, which are withheld directly from employee pay, FUTA and SUTA are paid by the employer to the relevant government agencies. 

FUTA and SUTA taxes are calculated using a tax percentage rate and taxable wage base. The current FUTA tax rate is 6%, with a taxable wage base of $7,000. This means that each calendar year, each of your employee’s wages up to $7,000 are taxed at a rate of 6%. Anything above and beyond that $7,000 is not subject to FUTA. 

SUTA taxes are calculated in the same manner, except that the tax percentages and taxable wage bases vary widely. Check your state’s current guidelines to determine your SUTA tax rate. 

FUTA and SUTA are liabilities until they are paid. These taxes are typically due on the last day of each quarter, although you may be able to pay them annually if your business meets certain requirements. Consult your tax advisor if you’re unsure.

Workers’ Compensation Insurance

Whether your state requires you to carry workers’ compensation insurance or you carry it as part of your policy, the cost is a percentage of your payroll. The cost of workers’ compensation insurance can fluctuate due to a number of factors, including number of employees, the nature of your business, and state requirements. 

Workers’ compensation insurance liabilities are the responsibility of the employer. The obligation is fulfilled whenever your insurance premiums are due, as set by your provider.

Other Liabilities

In addition to the above-mentioned payroll liabilities, here are some others you may encounter.

Payroll Service Costs

If you use a payroll service provider, the costs associated with using that service are considered a payroll liability. Any fees due to accountants, payroll software providers, or employer organizations accrue until they are paid by the employer. 

Payroll service providers typically charge a rate known as PEPM, which stands for per employee, per month. This means the amount due to the service provider each month is based on the number of employees on your payroll. Providers also charge by frequency, meaning a fee is associated with each payroll run. Still others charge a fixed rate set by the initial contract.  

Health and Life Insurance Premiums

Company-sponsored health and life insurance plans are typically structured so that both employer and employee make contributions. Employee contributions are made as pre-tax deductions from their paycheck. 

Employer contributions are accounted for and considered liabilities until the insurance bills are paid for according to contract. Insurance bills are typically due monthly. 

Retirement Contributions

If your company offers a retirement plan, it’s up to employees to determine how much they’d like to withhold from their paycheck to be deposited into their retirement account. However, if you offer a company matching contribution, the matching contributions are considered payroll liabilities until they are submitted to the investment company. 

How To Pay Liabilities

The method of paying out a payroll liability differs depending on who is being paid. Employee wages are paid directly to employees, as are bonuses, commissions, and incentive compensation.

Payroll taxes are usually paid through a federal or state payment portal. If you’re using a payroll service, they will pay liabilities on your behalf. Payroll liabilities associated with insurance are either paid by submitting a company-issued check or deposited through an online service portal with your provider. 

Payroll Liability Tips

Keeping payroll processing functions as organized as possible is the best way to ensure you’re accounting for all your payroll liabilities. Here are some tips to help you stay on track:

• Use a calendar to keep track of liabilities deadlines, and be sure to set reminders.
• Keep your payroll expense account separate from other business accounts, and maintain a reserve of cash so you can continue to pay employees even if sales fluctuate.
• Use a payroll service or payroll software to handle payments and streamline accounting for payroll liabilities. 

Investing in the latest payroll accounting technology or enlisting the help of a trusted payroll service provider is often a good idea. Both can be expensive, but the peace of mind will be worth it! 

Summary

Payroll liabilities are a necessary part of running a business, so it’s important to account for them and pay them on time. If you’re having trouble staying on top of it, you might consider investing in payroll software or hiring a service provider. Missing tax payment deadlines or falling behind on bill payments is often costly, and can impede your business operations.