What is a Payroll Liability?
A payroll liability could be as broad as the total of employees’ wages for a pay period, or as specific as a wage garnishment for a single employee. In a nutshell, payroll liabilities are what an employer owes after processing payroll, but before remitting any funds. Certain payroll liabilities are due almost immediately after processing payroll – for example, paychecks or some types of employment taxes. Others, such as paid time off (PTO), have more flexible deadlines. Understanding payroll liabilities isn’t just important for the sake of your employees; it’s also a crucial part of maintaining regulatory compliance. By learning the ins and outs of payroll liabilities, you can foster trust with employees and reinforce your organization’s compliance at the same time.
Types of Payroll Liabilities
Employee compensation
Employee compensation is the largest payroll liability per pay period, and it includes all hourly, salaried, and overtime wages that have been earned since the last payroll. If employees have accrued bonuses, commissions, or tips during the pay period, they’re also included. Payments to independent contractors aren’t included in payroll liabilities, because 1) they’re paid apart from the regular payroll process, and 2) employers don’t withhold taxes from them. Even if an independent contractor happens to be paid on the same day as payroll is processed, the amount owed still wouldn’t count as a payroll liability.
Payroll and income taxes
Any tax that gets withheld from employee paychecks is considered to be a payroll liability. The main ones include:
- Federal Insurance Contributions Act (FICA) taxes, which are made up of Social Security and Medicare taxes. Employees and employers each pay 50% of FICA taxes due, and employers are responsible for withholding and remitting the taxes to the IRS.
- Federal income tax withholding, which the employer withholds and remits to the IRS at the same time as FICA taxes.
- Federal Unemployment Tax Act (FUTA): the employer is responsible for 100% of FUTA taxes, so employees’ net pay isn’t affected. State unemployment taxes may also apply.
- State and local payroll taxes, if applicable; the rates and deadlines for each type of tax will vary.
Employee benefits
For an employee benefit to be a payroll liability, it must either be withheld from a paycheck, or be an amount owed by the employer to pay for the benefit. Examples include:
- Insurance plans for medical, vision, or dental coverage.
- Flexible Spending Accounts (FSAs).
- Health Savings Accounts (HSAs).
- Retirement contribution plans, such as 401(k)s, 403(b)s, employee stock ownership plans (ESOPs), and profit-sharing plans.
- Paid time off (PTO), but only in states where it counts as earned wages. In this case, PTO is considered to be “paid” by the employer once the employee takes time off.
Non-monetary employee benefits like workplace amenities, employee discounts, the use of company vehicles, etc., aren’t considered to be payroll liabilities.
Court-mandated garnishments
If an employer has received an order to garnish employee wages for child support, tax levy, or debt repayment (among others), the garnishment will be a payroll liability until it’s been remitted. Employers should make sure to comply with wage garnishment laws, as well as keeping communications open with affected employees.
Differences Between Payroll Liabilities vs. Payroll Expenses
The key difference between payroll liabilities vs payroll expenses is timing. Before the expenses are paid, they’re payroll liabilities. After the pay period’s wages and benefits are disbursed, taxes remitted, garnishments paid, and so on, they become payroll expenses. While the difference may seem like just a technicality, it’s actually a vital link in the chain of financial management. When you have a solid grasp of payroll liabilities vs payroll expenses, you’re less likely to have issues with managing cash flow, paying employees on time, filing and paying payroll taxes accurately, and other essential aspects of running a healthy business.
The Process: Employers Calculate Payroll
While the actual process of calculating payroll liabilities has to follow a complicated set of regulations, it can be simplified into just a few steps.
- Add up gross wages for all employees.
- Calculate all applicable withholdings and benefits.
- Subtract withholdings from employee gross pay.
- Pay employees and remit withholdings, or schedule future remittances as applicable.
Of course, there are other aspects to the process that need to happen in the background; for example, keeping track of employee life changes that could alter their tax status, or updating company policies to reflect regulatory changes. Even so, a birds-eye view of the process can help you avoid getting lost in the details.
Why Does Payroll Software Help Employers?
Knowing the answer to the question “what are payroll liabilities?” is important for employers, but with the help of payroll software, you won’t have to know every detail of payroll liability regulations. When you use our software to automate payroll, you can drastically lower processing times, reduce errors, strengthen compliance, and even improve employee satisfaction rates. If you’re interested in learning more about what we can do for your company, feel free to reach out – we’re here to help.
FAQs: Payroll Liabilities
When are payroll liabilities due?
The deadline can vary for each payroll liability. For example, employers can choose how frequently they pay employee wages, as long as they comply with applicable laws. Federal law doesn’t mandate a particular pay frequency, but some states (including Georgia) require employers to pay employees at specific intervals. Federal taxes have to be paid accurately and on time to avoid penalties, but the actual deadlines will vary depending on the amount and the type of business. Employers may also have payroll liability deadlines for state or local taxes, depending on factors like location, industry, business or employee types, etc.
What happens if payroll liabilities aren’t paid on time?
This depends on which payroll liability goes unpaid. If employee wages aren’t paid on time, that could leave the company open to legal penalties or lawsuits, not to mention damaging employee trust. If payroll taxes aren’t remitted on time, the employer would be subject to financial penalties from the IRS, as well as from any applicable state or local agencies. Failure to pay wage garnishments on time can also have serious consequences, including interest charges or legal judgements.
What are common payroll liability challenges?
Managing payroll liabilities takes a lot of time and effort, and this can result in challenges for businesses of any size. These are some of the most common:
- Incorrectly classifying employees as independent contractors leads to unpaid payroll taxes, resulting in penalties from the IRS (and potentially other consequences).
- Using old or incorrect withholding rates can cause under- or over-paying, neither of which is beneficial for the organization.
- Manual-entry systems are much more likely to result in errors compared to automated systems – and it only takes one mistake to cause big problems.
- Poor planning for payroll tax liabilities can cause bottlenecks in cash-flow, not only affecting the company, but possibly its employees as well.
Can employers track payroll liabilities?
Yes, there are multiple ways to track payroll liabilities. The best one by far is to use specialized payroll software, which lets you track each payroll liability, as well as automating things like payroll tax filing and tax deposits.
How can employers prevent liability issues?
With the right strategies and tools, you’ll be well equipped for preventing payroll liability issues before they happen. Using reliable payroll software is a great way to cut down on the possibility of manual errors, keep up with evolving regulations, and avoid missed filing deadlines. You could also go a step further by outsourcing to payroll experts, who can help with part or all of your payroll responsibilities.
