What Are Payroll Liabilities? A Guide for Employers

The accrual method allows you to match payroll expenses with revenue and posts payroll expenses and liabilities in the same period. Using a payroll solution such as QuickBooks Payroll powered by Employment Hero to process payroll and avoid manual calculations can save time and errors. Documenting your payroll process will also be of great benefit.

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The accrual method posts payroll liabilities and expenses in the same period.
To do this, compare your payroll register with the amount you are paying the staff member by cash, check, direct deposit or an alternative payment method.
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Employees receive payment for the work they did in a specific pay period, and are typically paid on a weekly, biweekly, semimonthly, or monthly payroll schedule.

Then employees receive their paychecks for that pay period on January 17. Until you pay employees, those wages are a liability because it’s money you owe. In that journal entry, you’re recording all of the deductions you have to take, as a business owner, from the employee’s check. For transparency and visibility, employees can find these deductions on their pay stubs. Taxes and other deductions are based on the forms your employees fill out.

Payroll Taxes

Employers’ percentage of payroll tax obligation and FUTA are considered an expense to the business. It is best to envision the company balance sheet when analyzing the relevant accounting entry process. Accounting entries at the point in time when employees are paid constitute debits to income statement payroll expenses along with payroll tax liability credits.

Because of this, every business should use the accrual method of accounting, which matches the revenue it earns with the expenses it incurs. State tax liabilities are similar to federal taxes in that you pay your state payroll tax using the state-specific depositing schedule. Read our step-by-step guide on how to file payroll taxes for more information on the process.

Businesses report their payroll expenses on income statements. Such a financial report names capital expenditures for the current period of accounting in accordance with income in that period of time. In contrast, payroll liabilities are entered onto the balance sheet, making it clear that the business has an outstanding financial obligation to employees. It might feel like there are a hundred kinds of payroll taxes. From Social Security and Medicare to state and federal unemployment taxes, the list goes on and on. As a business owner, it’s your job to pay your share of the taxes and manage tax withholdings from employee paychecks.

Calculations will also depend on your state and sometimes your city or county.
Your share of the costs is a payroll expense, but the employee’s contribution will not be a payroll expense.
For example, if you hire a worker to paint your office building, then it is likely that they will start working right away.
For companies that hire employees, payroll liabilities are a very important part of their expenditure.

You can pay benefits either as a lump sum or on a monthly basis. If a liability check is voided, Payroll Liability Balances will show a positive balance. But what are assets and liabilities and what sets them apart? Please make sure to use the correct tax tracking type for the insurance. All businesses are required to maintain detailed payroll records. Accurate recordkeeping can protect your business in the event of an audit.

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The form tells employers how much to withhold from a paycheck for tax purposes. The number of allowances on the W-4, along with the gross pay, determines the tax withholdings. The current employer’s FUTA tax rate is 6% on the first $7,000 in gross income a worker earns. If wages are subject to a state unemployment tax, the employer can use a 5.4% FUTA credit, which reduces the FUTA tax to 0.6%. Total federal and state unemployment taxes vary and depend on each state’s unemployment program. Employee compensation, taxes, and voluntary deductions all generate payroll liabilities.

Payroll Deductions as Liabilities Vs. Payroll Expenses

Employers must establish payroll accounts through the IRS when adding employees. The employee’s W-3 dictates the taxes withheld by the employer. The greater the number of deductions and credits an employee qualifies for, the less burdensome the withholdings become for the employer. Every last detail of employee financial compensation matters a great deal. Business owners are tasked with managing their enterprise while satisfying payroll obligations to employees as well as those owed to federal and state governments.

For example, say an employee has 24 hours of PTO and has already taken eight hours off. Those eight hours have already been paid evaluate the hr budget planning proposal and negotiation strategy workshop out and are an expense. The remaining 16 hours are still owed to the employee and are, therefore, a liability to the company.

What Is the Difference between Payroll Liabilities and Payroll Expenses?

Several withholdings and deductions are taken out of an employee’s gross pay. The benefits you offer, your industry, and other factors affect which accounts you need to record payroll. Then, give you advice on how to manage the situation without throwing off your books. Omnipresent makes it easy to hire, pay, and support your international team with our top-notch services including our trusted global employer of record services. This helps you easily navigate varying local requirements and regulations. There are two ways to manually enter payroll in QuickBooks Online if your payroll software product doesn’t integrate with it.

Scenario 2: A liability check or a paycheck was voided after the liability is paid

Companies will also have payroll expense and liabilities for federal and state taxes. Companies must pay a portion of Social Security and Medicare taxes on every individual the business employs. Companies recognize the expense when they owe workers money and remove payroll tax liabilities when the business pays government tax authorities.

Payroll Tax Expense vs. Payroll Tax Payable

While liabilities will vary from business to business, we’ll examine the most common payroll liabilities you’re likely to encounter. Small businesses rarely record this liability in their books. But business owners should keep in mind how many hours they’ll need to pay out in the future. Essentially, payroll-related accounts include a mixture of expenses and liabilities.