A business owner without liabilities is like a house without a door—you just don’t see it. And if you’re an employer, one of your many liabilities revolves around payroll. You can’t neglect or delay paying your payroll liabilities, or you may face disgruntled employees, IRS penalties, and upset payroll service providers. So, what are payroll liabilities?
What are payroll liabilities?
Payroll liabilities are any type of payment related to payroll that a business owes but has not yet paid. A payroll liability can include wages an employee earned but has not yet received, taxes withheld from employees, and other payroll-related costs. These liabilities accompany every payroll you run. Most items do not remain a payroll liability for long.
As an employer, you must know which payroll liabilities you’re responsible for. Because these liabilities represent money you must pay out at a future date, they can be easy to overlook. But if you don’t take these liabilities into account when creating your budget, you could run out of funds.
Learn more about each type of liability relating to payroll below.
The purpose of running payroll is to pay your employees. Naturally, one of your liabilities includes those wages themselves.
Employees generally work during a pay period (e.g., biweekly) and receive wages for their work during that period after it’s over. For example, employees who worked from November 4 – 15 may receive wages for their work on November 22. Prior to paying them, those unpaid wages are liabilities because you owe them to your workers.
The most common payroll obligations are the taxes that make up an employer’s 941 deposits. If you’re familiar with your payroll tax obligations, you know that you must withhold:
- Federal income tax
- State and income tax, if applicable
- Social Security tax
- Medicare tax
- Other state-specific taxes, if applicable
And, you must contribute employer taxes on your employees’ wages.
When you withhold these taxes from an employee’s wages and contribute your employer share, you don’t deposit them immediately with the IRS or state tax agencies. Instead, they are payroll tax liabilities until your deposit date.
Payroll service costs
Wages and taxes aren’t your only payroll-related liabilities. Unless you handle payroll by hand, you have to pay for software or a PEO (professional employer organization). These are liabilities you incur and are responsible for paying.
If you use software, the company may bill in arrears. That means you use the service for the month and pay at the end of the month or the following month. This is considered a liability until you pay.
Other payroll costs
Of course, we can’t forget about the other types of deductions that you might withhold from an employee’s wages. You may need to handle health insurance contributions, retirement fund contributions, or wage garnishments.
And you know what that means—these contributions and other withholdings are liabilities until you send them over to the proper parties.
Paying your liabilities
As with any type of liability, you must pay your payroll liabilities to the appropriate recipients.
Pay your employees their wages depending on your frequency and the payment method (e.g., direct deposit). And, send premiums, contributions, and garnishments. Last but not least, don’t forget to pay your payroll provider.
When it comes to handling your federal payroll tax liabilities, deposit them according to your IRS depositing schedule. You will either deposit your payroll tax liability monthly or semiweekly, depending on your previous tax liability during the IRS four-quarter lookback period.
Most employers remit these liabilities using the Electronic Federal Tax Payment System (EFTPS). If you use a payroll tax filing service, they will deposit your payroll tax liabilities on your behalf.
You can pay your state payroll tax liabilities according to your state’s depositing schedule.
Keeping track of payroll liabilities
To avoid missing your deadlines for paying liabilities, you need to keep track of them. There are a few things you can do to stay on top of them.
Use a reliable system to run payroll. If you use software, you don’t have to worry about wage or tax calculations. And if you opt for full-service payroll, you won’t have to stress about depositing your payroll tax liability.
Keep copies of all of your payroll-related documents. Make sure they include dates so you know when you incurred your liabilities and when they’re due. You can also set reminders to meet deadlines.
Another way to track your liabilities is to use payroll accounting. Payroll accounting gives you a clear record of your liabilities, including wages and taxes. It also shows you whether you’ve paid your liabilities or not.
You might also consider opening a separate payroll account to avoid mixing your payroll and regular funds.
Payroll liabilities best practices
Want a smooth and steady payroll experience? Check out these payroll liabilities best practices to ensure your employees, the IRS, state tax agencies, your payroll provider, and other parties get the money you owe them:
- Have a cash reserve to cover payroll if money is tight
- Use a reliable payroll system
- Know your deposit schedule
- Set reminders
- Keep accurate records
- Open a separate payroll bank account
Say goodbye to worrying about your payroll tax liabilities. With Patriot’s Full-Service payroll services, you never have to handle depositing your payroll tax liability again—we’ll deposit them on your behalf. Take advantage of your free trial now!
This article has been updated from its original publication date of 2/4/2015.
This is not intended as legal advice; for more information, please click here.