Payroll liabilities are any type of payment related to payroll that the company owes, but has not yet paid. Payroll liabilities can include taxes withheld from employees, such as federal and state income tax, Social Security, and Medicare, as well as other items such as union dues, health insurance contributions, 401k retirement fund contributions, and payroll garnishments.
The most common payroll liabilities are the taxes that make up an Employer’s 941 deposit. Employers are required to withhold federal, state, and local income tax from most employee paychecks, as well as Social Security and Medicare taxes which the employer matches. Most employers remit these payroll liabilities on a monthly schedule using the Electronic Federal Taxpayer System (EFTPS).
Payroll liabilities can be tricky
Because payroll liabilities represent money that must be paid out at a future date, they can be easy for a business owner to overlook. If these liabilities are left out of calculations or not taken into account when looking at the business’s overall budget and cash on hand, it can leave the company dangerously short. A good CFO or business owner will keep payroll liabilities in mind when looking at the company finances, but it can be easy to forget that these liabilities exist.
Because of the complexity of payroll, many employers outsource payroll to a payroll services provider or rely on payroll software to handle the task. Employers need to track each payroll liability and remit according to the proper timeline, including health insurance premiums, income tax, Social Security tax, Medicare payments, retirement contributions, and more. Some items may not remain a payroll liability for long. Health insurance premiums and union dues, for example, are often paid out to the insurance company right away. This is not true of all payroll liabilities, however.
Taxes may not always be paid right away, and this is one area where payroll can become somewhat tricky. Accounts must be kept for all payments to be made to FICA/social security, FUTA/federal unemployment taxes, income tax, and SUTA/state unemployment taxes. It’s vital that each category be carefully tracked — the employer must know how much was paid for each employee in each category. All records need to be kept up to date and organized in such a way that if the IRS or a state agency asked for an audit, the information could be quickly retrieved and clearly understood.
Businesses that fail to make scheduled payroll tax deposits can find themselves in trouble. Employers missing a 941 deposit, for example, may receive a Failure to Deposit (FTD) notice and owe additional penalties and interest. Employers should refer to the Employer’s Tax Guide, also known as IRS Publication 15 or Circular E, for more information on making timely payroll tax deposits.
Keep track of payroll liabilities
It’s important to find a reliable method for keeping track of payroll liabilities, such as with payroll software or a spreadsheet. Businesses can keep track of the different amounts owed to different entities by using multiple accounts. For example, the company may have one account that lists all gross salaries and wages paid out to each employee. This includes all taxes and other benefits; this account simply shows everything the company paid out in relation to each employee’s employment.
Then the company will have a second account that lists only the salaries or wages actually paid to the employee (their net pay). This is the money they actually receive and doesn’t include taxes, health insurance premiums, etc.
The difference between these two accounts that often falls into the payroll liabilities category, although the employee pay can be considered a payroll liability if the pay is issued in the form of a check and that check has not yet been cashed.
Alternately, payroll software can be especially helpful for keeping track of payroll liabilities. It’s easy to generate a quick report for a certain time period which lists the amounts due to the various taxing agencies. Some business owners decide they don’t want to deal with remembering payroll liabilities at all and hand off the task entirely to a payroll tax provider, who handles all payroll taxes on their behalf.