Payroll liabilities make up what a company owes to employees, the government, and other entities as a result of processing payroll. Employer payroll liabilities can include wages that have been earned but not received, withheld taxes, deductions and withheld contributions for benefits, paid time off, and workers’ compensation insurance premiums, among other elements.
What you’ll learn
What you’ll learn
Updated: February 28, 2025
Key takeaways
- Payroll liabilities encompass everything a company owes related to employee compensation, including wages, taxes, benefits, and insurance, that has not yet been paid.
- Accurate tracking and timely payment of payroll liabilities are crucial to avoid penalties, legal issues, and potential damage to employee morale
- Implementing reliable payroll systems and maintaining detailed records are critical best practices managing payroll liabilities
- Compliance requires understanding various payroll components, such as employee wages, taxes, paid time off, and potential wage garnishments
Payroll accounting is essential to maintaining good business practices and legal compliance. Savvy business owners should understand and have the tools to manage payroll tax liabilities and associated responsibilities.
In this guide, we’ll cover common payroll liabilities, practical ways to track them effectively, and the risks of mismanagement.
Defining payroll liabilities
First things first, let’s define what payroll liabilities are. To do this, we spoke with David Kindness, a certified public accountant and OnPay contributor who has worked with small businesses for over a decade.
- Payroll liabilities, like any other liability, represent an amount you owe related to employee compensation, that has not been paid yet. You may owe this amount to the employee or to a health insurance provider or retirement account provider on the employee’s behalf.
- Technically, you start owing a payroll liability as soon as the employee starts performing work in a new pay period. As they perform more work, the liability continues to increase. Then, when the pay date arrives and you pay your employees, the liability is reset to zero – and the process starts all over again in the next pay period.
- However, because this is a regular part of nearly every business’s operations, it’s recorded as accrued payroll in the liability section of a business’s balance sheet. This differentiates it from other more “real” liabilities, unless it’s actually left unpaid after the pay date.
— David Kindness, CPA and OnPay subject matter expert
Now that we better understand what this term means, let’s find out more about its a topic that employers should be familiar with.
Why are payroll liabilities important?
Simply put, payroll costs, expenses, and tax liabilities are all very important aspects of running a business. Together they represent the money a company owes from processing the payroll to paying its employees, which is a significant expense for most businesses. If a company fails to accurately track and pay its payroll liabilities on time, it can face severe penalties and fines, legal issues, reputation damage, decreased employee morale, and further consequences.
Are you running in circles when trying to understand which payroll liabilities need to be at the top of your to-do list? Once more we turned to David Kindness, a certified public accountant with over a decade of experience helping small businesses.
How do I determine my payroll tax liabilities?
Determining your payroll tax liabilities involves two steps: understanding which payroll taxes you’re required to withhold and pay, and calculating those taxes. Here’s a step-by-step guide to help navigate this process:
- Identify worker classification: first, it’s important to ensure that all of your workers are classified properly, as either employees or independent contractors. Payroll taxes apply to employees but not contractors, and misclassification can lead to penalties or legal trouble.
- Understand applicable taxes: for employees, you’ll need to withhold income taxes, Social Security and Medicare (FICA) taxes, federal unemployment tax (FUTA), and any applicable state and local taxes. These are the taxes you’ll be liable to either pay yourself or remit on behalf of employees. Let’s describe them below.
- Withhold income taxes: both the federal government and most state governments impose income taxes on the gross income earned by employees, so you’ll need to withhold both federal and any applicable state income taxes from their paychecks.
- Withhold Social Security and Medicare (FICA) taxes: the federal government also charges FICA taxes on each employee’s gross income. FICA is made up of Social Security taxes of 6.2% and Medicare taxes of 1.45% on employee income. The employer is also responsible for paying these same percentages, so you must set aside 6.2% and 1.45% from your own funds as well.
- Withhold unemployment (FUTA) tax: you must withhold federal unemployment taxes, called FUTA tax, which is 6% ofthe first $7,000 of employee income. However, most states receive a 5.4% credit, so the true amount is 0.06% of the first $7k. Take a look at our FUTA tax guide to learn more.
- Withhold state and local taxes: check your state and local tax requirements. These taxes can vary significantly – some states have no income tax, while others do. You may also need to withhold state unemployment tax and potentially local income or other taxes. Look up your state tax authority’s website to learn more.
- Add up all applicable taxes: add up all the taxes you withheld or set aside in the previous steps, and this is your current payroll tax liability. Federal income and FICA taxes are submitted either monthly or biweekly, so those tax liabilities will remain on your balance sheet for 2 weeks to 1 month, while FUTA taxes are submitted quarterly, so that liability will remain on your balance sheet for up to 2 months or more.
This process can be time-consuming, but with good payroll software you can automate these steps and make calculating your payroll tax liability as easy as clicking a button.
Having a process to manage payroll liabilities makes good business sense because it affects your organization’s overall financial health and allows you to stay on top of paying your employees accurately and on time. It’s important to meet federal and local regulations to keep your business running efficiently, successfully, and free from regulatory issues.
Moving on, let’s cover some of the most common liability types that employers are likely to come across.
Types of payroll liabilities
What are payroll liabilities that companies need to keep in mind? These are common costs in a business’s payroll:
- Employee wages: Employee wages are typically the largest payroll liability for an organization. Wages for employees who have earned the funds but have not yet been paid are one of the most important expenses for a business to manage.
- Paid time off (PTO): This represents the amount of money a business owes employees who have used or accrued PTO.
- Payroll taxes: Federal income tax, Social Security tax, Medicare tax, and any other payroll taxes are considered a liability until the business deposits them with the government.
- Unemployment taxes: As with the other payroll taxes, unemployment taxes are also designated as a payroll liability until paid up.
- Workers’ compensation insurance: Workers’ comp insurance is the cost of insurance employers must carry to cover lost wages and medical expenses for anyone who is injured on the job. This insurance, factored into payroll liability until it is paid to the insurer, is 100% the employer’s expense.
Finally, wage garnishments can also be a payroll liability. If an employer learns one of their employees has a court-ordered wage garnishment, they are legally required to withhold funds from the employee’s paychecks and pay the funds to the designated party.
Now that we know the common types, let’s explain how to calculate payroll liabilities.
How to calculate payroll liabilities
There are five key steps to calculating payroll liabilities:
- Gathering employee information: Collect the following for each employee: hours worked, pay rate, and W-4 form information for tax withholding calculations.
- Determining gross wages: To calculate employee gross pay, use the set salary for applicable employees, or multiply the employee’s hourly wage by the number of hours worked to determine the total wages paid to hourly employees.
- Identifying deductions and withholdings: After adding up all wages owed, you can determine specific employee deductions such as health insurance payments, contributions to a retirement plan or health savings plan, and any other pre-tax deductions.
- Calculating withholding amounts: Calculate federal and state income tax withholding as well as Social Security, Medicare, and unemployment taxes that will be deducted from each paycheck. You should also calculate the business’s share of Social Security and Medicare taxes as well as unemployment taxes. Take a look at the “How do I determine my payroll tax liabilities?” section listed above for more details.
- Totaling the liabilities: Add all of the above to determine total payroll liability.
This leads us to our next section with guidance on how to keep up with each of process steps.
How do you account for payroll liabilities?
The good news is that managing payroll liabilities is relatively straightforward if you follow a few industry best practices. You have already accomplished the first step: taking the time to understand payroll liabilities and recognize why payroll reporting matters to your business. Next, follow these guidelines to keep your business’s payroll functioning smoothly:
Implement reliable payroll systems
The better your payroll systems, the better your records and your payroll management. A reliable payroll system is not optional for successful businesses. A payroll vendor can save your organization precious time and money while reducing errors and increasing efficiencies.
Track payroll liabilities effectively
The Internal Revenue Service (IRS) offers guidelines and regulations on howto maintain proper payroll documentation. It calls for keeping payroll- or tax-related documents for three years or longer.
It is critical for businesses to keep accurate payroll records, calculate taxes and deductions accurately, and maintain a clear payroll policy guide for payroll liabilities and payroll processing. Tracking payroll liabilities is not something to take lightly, and it should be a key part of every company’s balance sheet.
Again we tapped David to help us answer a question that many employers have on their mind when it comes to this topic.
Which report shows the balance of all payroll liabilities?
“The total balance of all payroll liabilities can be found in two main documents: the general ledger, which is a detailed report that tracks all of a business’s financial transactions, and the balance sheet, which is one of the three major financial reports and lists a business’s assets, liabilities, and owner’s equity.”
— David Kindness, CPA and OnPay subject matter expert
David also offers up some practical guidance that his clients tend to stick with:
- Maintain a steady cash reserve to cover payroll if funds are low, and hold these funds in a separate payroll bank account
- Communicate with your employees so they understand what deductions they will see on their pay stubs and when to expect their paycheck
- Regularly review and reconcile payroll records to ensure accuracy
- Keep track of deadlines for depositing payroll taxes
Once more, we caught up with David to help us understand how business owners ensure that the dollars owed get from point A to point B.
How do businesses remit payroll liabilities properly?
The process for remitting payroll liabilities depends on the type of payroll liability in question. There is payroll itself, which must be sent to employees, then there are federal and state taxes, which must be sent to federal and state governments, respectively. Let’s quickly cover how to remit each type of payroll liability:
- Payroll: You must send payroll amounts to your employees by the due date. Employers generally send these funds using direct deposit, ACH transfer, check, or cash.
- Benefits: Payroll benefits must be either remitted to a financial institution or held in a bank account. Benefits include:
- Paid leave: Funds to cover an employee’s paid time off (PTO), sick days, maternity or paternity, or other paid leave must be set aside for future use, generally in their own bank account.
- Health insurance: Employer-sponsored health insurance payments, as well as HSA and FSA payments, must be paid to the business’s health insurance provider.
- Retirement benefits: Amounts due for employer-sponsored retirement accounts, such as 401(k)s and SIMPLE IRAs, must be paid to the financial institution providing the retirement accounts.
- Payroll taxes: Payroll taxes must be sent to the appropriate tax authority. These include:
- Income taxes: Income taxes must be submitted to the Internal Revenue Service (IRS) either monthly or biweekly. The easiest payment method is the Electronic Federal Tax Payment System (EFTPS) provided by the IRS, but a wire payment, physical check, or money order also works.
- FICA taxes: Like income taxes, Social Security and Medicare (FICA) taxes are due either monthly or biweekly. They can be paid using the same methods.
- FUTA taxes: Federal Unemployment (FUTA) taxes are due quarterly on April 30, July 31, October 31, and January 31. Use Form 941 to submit these taxes. You must also file Form 940 annually on January 31st to summarize the FUTA taxes you paid.
- State and local taxes: State and local income taxes and state unemployment taxes (SUTA) must be paid according to your state tax authority’s guidelines.
- Wage garnishments: Wage garnishments must be withheld from your employee’s paycheck, generally due to a court order. They must then be remitted directly to the party indicated on the court order.
Payroll liabilities vs payroll expenses
In brief, payroll liabilities are how much money is owed for payroll, while payroll expenses are the money actually spent on payroll. Liabilities refer to what your company is responsible for paying in relation to a specific pay period, such as employee wages, paid time off, and payroll taxes. Payroll expenses are the actual costs taken out of your budget to cover all the liabilities and pay your employees on the pay date.
Until the money owned for payroll is paid, it is considered a payroll liability. For accurate budgeting and tax reporting, these liabilities must be a part of every organization’s financial planning and management.
Consequences of mismanaged payroll liabilities
In terms of business compliance, there are several significant challenges with payroll liabilities. Likewise, there are often serious consequences for mismanaging payroll liabilities, which is why it pays to get it right the first time:
- One major challenge is inaccurate or missed tax payments, which can lead to steep fines and interest owed.
- If your payroll system is manual or overly complicated, your employees may spend several hours tracking down issues and dealing with errors when things go awry. This has a high price tag of wasted employee time for your business.
- Late or inaccurate reporting can also involve a tax agency assessing an expensive penalty on the business.
- Finally, inaccurate paychecks are a major compliance challenge with mismanaged payroll liabilities. The penalties for this can be major, especially when employees are unhappy and disengaged, and your business has to spend a significant amount of time correcting these errors.
Creating and sharing clear payroll policies, understanding all reporting deadlines, maintaining accurate records, and instituting automated payroll processes help prevent all of these issues. Proper payroll compliance is a must for businesses of all sizes and industries.
Takeaway: Take a closer look at setting a process to manage payroll liabilities
If your business is struggling with managing its payroll liabilities, it could be time to consider a tool to help keep track of it all. Our full-service payroll software can support your business in everything from payroll liabilities and tax management to greater payroll automation.
OnPay syncs with your favorite programs so you never have to worry about complex issue like double entry bookkeeping, and eases the stress of payroll liabilities management so you always get it right. Learn how your business can save time and money and ensure payroll accuracy with payroll liabilities management software from OnPay.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.