Liabilities are a fact of life for a business owner. Payroll liabilities affect not only the health of your business but also the livelihoods of your employees. These liabilities must be paid in a timely manner and tracked closely. Otherwise, businesses could risk high employee turnover, as well as fines from the U.S. Internal Revenue Service (IRS).
You have options when it comes to managing your payroll liabilities. Whether you choose to conduct payroll yourself, hire an accountant or invest in payroll software, this guide will help you learn the basics of payroll liabilities, including the different types and how to track them.
What are payroll liabilities?
|Payroll liabilities are payroll expenses a business owes but has not paid. These liabilities can appear every time you run payroll. Obligations may include employee compensation, withholdings, and expenses such as the employer’s share of Social Security and Medicare taxes.|
The most apparent liability when you run payroll is employee wages. Employees can receive pay daily, weekly, twice a month or on any other agreed-upon schedule. Before payroll is processed, the unpaid wages are liabilities, since you owe money to your employees for work they’ve already completed.
Wages are calculated differently depending on whether workers are salaried or hourly.
Keeping a PTO liability account offers more benefits than just knowing when your employees have taken a day off. The main reason to keep track of employee PTO is knowing exactly how much money you will have on hand if an employee quits without using their PTO.
Keeping track of PTO is straightforward when you’re using the best payroll software. First, input the formula you use to give employees PTO. For example, they might earn 0.05 PTO hours for every hour worked. Once the PTO rate and hours worked are logged, this number is multiplied by the employee’s hourly rate. The sum is the money you would be liable for if the employee quit without using their PTO.
If your business does not allow PTO to roll over from one year to the next, the PTO accruals are negated at the end of the year. Likewise, if your business has an unlimited PTO policy, PTO accrual doesn’t apply.
Every employer must withhold payroll taxes from employees and submit these withholdings to the IRS along with their own tax payments. But you don’t automatically transfer the taxes to the IRS when you withhold these funds. Payroll taxes are considered liabilities until your deadline to transfer funds to federal, state, and local agencies.
Payroll tax withholdings include the following:
To accurately calculate employee payroll taxes, you must have your employees fill out and submit Form W-4.
Other types of employees your business might work with include contractors and freelancers, who typically charge an hourly rate or a flat fee. These workers usually fill out a 1099 form instead of a W-4.
As of 2021, seven states don’t collect income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
If you use an accountant, payroll software or professional employer organization (PEO) to manage payroll, these costs will also be added to your payroll liabilities.
Payroll companies generally charge employers in three ways: per frequency, per employee per month (PEPM), and fixed pricing. PEPM pricing is the most popular and can be the most cost-effective. For example, if you pay per frequency and process payroll weekly, you will pay the payroll fee weekly.
If you choose a fixed pricing plan, you may be paying for more workers than you have. For example, if the fixed plan charges $150 for up to 25 employees and you only have nine employees, a PEPM plan could be significantly cheaper. Plus, fixed plans often have an employee cap, which is not ideal for companies that are planning for exponential growth.
Along with federal, state and local tax responsibilities, as an employer, you are also responsible for voluntary deductions. These may include the following:
All of these withholdings are liabilities until you transfer the money to the appropriate agencies.
|Liability type||Payment method|
|Gross wages||Pay to employees via paper check or direct deposit.|
|Federal income taxes||Use Form 941 to report and file.|
|FUTA taxes||Use Form 940 to report and file.|
|Medicare and Social Security taxes (FICA)||Use Form 941 to report and file.|
Tax law changes, employee status changes, and workers who change tax and withholding information can significantly change payroll liabilities each pay period.
It’s essential to keep your payroll organized and up to date. Doing so will ensure your business runs smoothly and can handle financial growing pains as they arise.
Most payroll software solutions are affordable, considering they automate processes and eliminate human error. Payroll software can also help automate employee onboarding, company training, tax filing, payroll and deduction errors, and more.