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Updated Mar 12, 2024

What Are Payroll Liabilities?

Business owners should understand payroll-related payments, taxes and more.

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Julie Thompson, Senior Writer & Expert on Business Operations
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Payroll liabilities are commonplace in day-to-day business. Whether you’re paying employees, using a payroll service or facing IRS penalties, it’s easy to get overwhelmed by the complexities of running payroll

We’ll walk you through the basics of payroll liabilities and provide tips for streamlining your payroll.

Editor’s note: Looking for the right payroll software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What are payroll liabilities?

Payroll liabilities are payroll-related payments you must pay for your business. These liabilities include employee-earned wages 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.

Payroll liabilities vs. payroll expenses

The terms “payroll liability” and “payroll expense” sound similar, but they have some key differences. 

  • Payroll liabilities: The 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 term refers to the total payroll amount for the specified pay period.

Payroll liabilities include tax withholdings, benefit deductions, retirement contributions and union dues. You must calculate each liability accurately and send it to the proper authority. After you take all payroll deductions from your employees’ gross pay, they receive their net pay. Net pay is the actual dollar amount your employees receive for their work. Net pay can be distributed via cash, check or direct deposit.

Bottom LineBottom line
Payroll expenses equal the sum of the gross pay of all your employees for a pay period. Payroll tax expenses show the total amount of money your business owes the IRS.

What are the types of payroll liabilities?

It is essential to know your specific payroll liabilities. Running payroll reports and analyzing them monthly will help you create an accurate budget, understand your labor costs and manage your small business’s cash flow.

Although liabilities vary from business to business, we’ll examine the most common payroll liabilities you’ll likely encounter.

Employee wages

Employees are an integral part of your business. To keep your employees and reduce turnover, you must pay them real wages on time. 

Wages compensate employees for work they’ve accomplished during a pay period. You’ll determine how often to run payroll: daily, weekly, biweekly or bimonthly. Before you run payroll, all unpaid employee wages are liabilities because you still owe that money.

Did You Know?Did you know
According to PayrollOrg's 2023 survey, 78 percent of Americans live paycheck to paycheck. Paying your employees accurately and promptly is a critical way to build trust and improve employee retention.

Payroll taxes

Payroll tax withholdings are another integral payroll obligation. All employers must file payroll taxes and contribute these taxes for every worker they hire. 

Here is a breakdown of payroll taxes, including those required by 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 must complete IRS Form W-4. When your employee fills out a W-4, it helps you determine their withholding allowances. The worker’s gross wages are also a factor in tax contributions.

Generally, payroll taxes are paid quarterly. However, because payroll taxes aren’t immediately sent to the IRS or state or local agencies, they are considered liabilities until deposited.

Payroll service costs

All businesses that invest in payroll software or a professional employer organization (PEO) 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 credit card or utility bills. PEO costs may have monthly or yearly contract fees.

Payroll companies have various pricing structures. It’s important to compare payroll software costs before you sign up because one pricing structure may be less expensive than another.

Here are the six payroll software pricing structures:

  1. Base fee: This is a monthly charge or per-payroll fee.
  2. Per-employee fee: The vendor charges for each employee enrolled in the service.
  3. Monthly fee: A vendor may charge a fixed price for unlimited employees.
  4. Set fee: This fee is based on automated software the employer uses for data entry and monitoring.
  5. Custom quote: This is an a la carte option for companies that need personalized software to fit their needs.
  6. License fee: A company pays this fee for business software or add-ons to existing software. The license fee can be a one-time fee or a term contract.

Other payroll costs

Depending on the employee benefits you offer and your employees’ current financial liabilities, you may have to account for several other payroll liabilities, including the following:

  • Health insurance 
  • 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.

TipBottom line
Prevent payroll discrepancies by carefully collecting accurate employee data during recruiting and onboarding.

How to pay your liabilities

If you neglect your liabilities, your company could face serious setbacks. All payroll liabilities should be paid accurately and on time to the correct recipients. Here’s how to do it:

1. Pay your employees.

Pay employees’ wages using your employer-designated pay schedule. Employees depend on the money they receive to pay bills and purchase food and gas. Once you’ve completed onboarding, analyze a new hire’s 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 use the electronic federal tax payment system (EFTPS) to deposit tax liabilities. If you’ve invested in a payroll tax filing service, it will take care of your tax deadlines.

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.

Best payroll software for tracking and recording payroll liabilities 

The best online payroll services track payroll liability deadlines and help with wage and tax calculations, deposits, and storage of payroll-related documents. Consider the following excellent payroll software options for small businesses:

  • QuickBooks: QuickBooks Payroll is a great all-in-one solution for small businesses’ payroll needs. It can handle payroll and bookkeeping functions, consolidate vendor contracts and streamline business operations. Our in-depth QuickBooks Payroll review details how the service can provide next-day direct deposit and handle tax filing, employee health benefits and 401(k) plans.
  • ADP: ADP Payroll is a flexible and scalable payroll solution that allows you to run payroll on a mobile device or desktop computer. 
  • Gusto: Gusto is an excellent option for businesses that need HR assistance along with payroll services. It integrates with top time-tracking tools and dozens of hiring, performance management and learning platforms. Our Gusto Payroll review highlights the company’s functional employee self-service portal that helps keep employee data and payroll details accurate.
  • Paychex: Large businesses should consider Paychex, which can support up to 1,000 employees. Its integrations are impressive, helping businesses handle complex payroll, HR and tax compliance issues. Our Paychex Payroll review explains how the service can process unemployment claims and provide cyber liability insurance. 
TipBottom line
If you process payroll manually, keep copies of all payroll forms and track when liabilities were received and when they are due. Set reminders so you don't miss critical deadlines.

How to adjust payroll liabilities

If your payroll liabilities don’t match up, you must make adjustments. Here are some common reasons for a payroll liability adjustment:

  • Fixing a health insurance company contribution
  • Correcting year-to-date employee wages, deductions or additions for someone no longer with the company
  • Editing the amount for business contributions to a health savings account or a 401(k) company match

How you adjust payroll liabilities depends on whether you modify them manually or automatically through payroll software. For example, if you complete payroll manually, you can enter an adjustment for any liability. However, if you use a payroll service, you won’t adjust any payroll liabilities that the service oversees, such as federal and state tax liabilities. 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 it.

Here are the basic steps for completing an employee payroll liability adjustment using QuickBooks:

  1. Run a Payroll Checkup.
  2. Run a Payroll Summary report.
  3. Go to the Employees menu, and select Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
  4. In the Date and Effective Date fields, select the last paycheck date of the affected month or quarter.
  5. In the “Adjustment is for” prompt, select Employee. (Select Company if you’re making a company adjustment.) 
  6. Select the Item Name column in the Taxes and Liabilities section. 
  7. Select the payroll item you want to adjust.
  8. Enter the amount of the adjustment. (If you under-withheld, enter a positive amount. If you over-withheld, enter a negative amount.)
  9. Complete the taxes and liabilities fields. (Enter the amount in the Income Subject to Tax column for a wage base adjustment, and add a note in the memo for reference.)
  10.  Select Accounts Affected > OK.
  11. Repeat if necessary.
  12. Run a Payroll Summary report and a Payroll Liabilities Balances report to confirm the changes.
FYIDid you know
Any liability adjustments will affect balances in future payroll reports. Make payroll liability adjustments if you have excellent accounting skills or are under the guidance of your small business accountant.

Reconciling payroll liabilities

Payroll reconciliation double-checks your calculations to ensure your employees are paid accurately. To do this, compare your payroll register with the amount you pay the staff member by cash, check, direct deposit or a direct deposit alternative.

Here’s how to complete a payroll reconciliation:

  1. Check the payroll register, which includes all payroll data.
  2. Gather the employee’s time-tracking data, including timecards and time sheets.
  3. Cross-check your staff pay rates (either hourly or salary).
  4. Confirm the deductions for each worker.
  5. Record wages and deductions in the general ledger.
  6. Submit payroll.

Here is the schedule for payroll reconciliation:

  1. Every pay period, at least two days before payday
  2. When you file your quarterly taxes with Form 941
  3. Once per year, in January, when you compare your payroll records with the employee’s W-2 form

Payroll reconciliation helps you prevent disgruntled employees, avoid financial penalties and fines from the IRS, and keep your books current. Payroll is a significant portion of a business’s overhead costs, so it’s essential to get it right. Payroll software can streamline reconciliation and alert you to any errors.

author image
Julie Thompson, Senior Writer & Expert on Business Operations
With nearly two decades of experience under her belt, Julie Thompson is a seasoned B2B professional dedicated to enhancing business performance through strategic sales, marketing and operational initiatives. Her extensive portfolio boasts achievements in crafting brand standards, devising innovative marketing strategies, driving successful email campaigns and orchestrating impactful media outreach. Thompson's proficiency extends to Salesforce administration, database management and lead generation, reflecting her versatile skill set and hands-on approach to business enhancement. Through easily digestible guides, she demystifies complex topics such as SaaS technology, finance trends, HR practices and effective marketing and branding strategies. Moreover, Thompson's commitment to fostering global entrepreneurship is evident through her contributions to Kiva, an organization dedicated to supporting small businesses in underserved communities worldwide.
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