What Are Payroll Liabilities? Definition, Types & How to Track

If you hire hourly employees, this amount can change each pay period based on how many hours each employee works. However, wages and employment costs are often one of your biggest expense categories too. So, keeping track of how much money it costs to pay your employees is essential. Payroll liabilities occur throughout the payroll process, even before you pay employees. For example, you’ll have payroll liabilities for wages you owe to employees and taxes withheld from their checks when you do pay them. Payroll processing is complex, meaning you’re likely to struggle to stay on top of the process.

What Are Payroll Liabilities? Definition, Types & How to Track

Keeping up with payroll tax laws can be confusing and time-consuming. You can make tax withholding easier by using software like Hourly. It automatically processes payroll and pays your taxes and workers’ comp premiums. This guide is intended to be used as a starting point in analyzing an employer’s payroll liabilities and is not a comprehensive resource of requirements. When employers decide on how to do payroll, they also need to understand all the payroll liabilities they have.

What Are Payroll Liabilities? All You Need to Know

FSLA also requires that payroll records be kept on file for at least three years. Before hiring employees, you need to decide if you want them to start working immediately or not. For example, if you hire a worker to paint your office building, then it is likely that they will start working right away. On the other hand, if you hire an assistant accountant, then chances are that they won’t be able to work for another few weeks. audit procedures You might also consider opening a separate payroll account to avoid mixing your payroll and regular funds.

You have to collect employee data, calculate wages and withholdings, and update your records accordingly. Now, this is a simple example where you only have one employee, and she doesn’t have any voluntary deductions, such as health care plan contributions. But recording payroll liabilities gets more complicated as you grow, hire new people, and offer more benefits.

Payroll Expense Vs. Payroll Liability

1. Now that you understand the difference between payroll liabilities and expenses, keeping track of both will be much easier.
2. Now, this is a simple example where you only have one employee, and she doesn’t have any voluntary deductions, such as health care plan contributions.
3. You’ll record the $150 and $76.50 as payroll liabilities, along with your company’s matching contribution of $76.50 for FICA taxes.
4. In this comprehensive guide, we’ll break down the different types of payroll liabilities.
5. For companies that hire employees, payroll liabilities are a very important part of their expenditure.

When you hire employees, you take on more than just the responsibility of paying their wages. You also have to manage payroll liabilities, which are extra costs of keeping staff. They’re typically short-term obligations that you haven’t paid yet. Companies will levered free cash 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.

The answer lies in an accounting category called liabilities—specifically, payroll liabilities. This accounting method does not post expenses based on cash inflows and outflows, referred to as the cash basis method of accounting. BenefitsDetermine the benefits that you will offer employees, such as health insurance, pension plans, child care benefits and paid leave.

However, this method can introduce plenty of human-related errors. Automated tracking is a bit more advanced but can reduce some of the frustrations you have. This helps you easily navigate varying local requirements and regulations. Payroll ScheduleDecide how often employees will receive payment based on their hours worked, job title and services rendered. The most common types of payroll schedules are weekly, biweekly, semimonthly (15th or 30th of each month) and monthly. Payroll accounting provides you with a record of tax obligations and legal obligations.

Companies report payroll expense on their income statements. This financial report lists all capital expenditures for the current accounting period in relation to the income earned during the same time. This account indicates the company owes employees money that remains unpaid. Companies will remove this liability in the subsequent month when it issues payroll choosing an escrow agent checks.

To calculate your total payroll liability amount, all you have to do is add up your current payroll-related costs that haven’t been paid yet. Use payroll software to generate a payroll-liability balance report each time you process payroll. Review the report, so you can post each adjusted journal entry. The IRS and state agencies have specific deposit schedules for payroll taxes—adhere to these schedules to avoid penalties and interest. Every business will have some payroll liabilities, but what are they, and what’s the best way to keep track of and manage your liabilities? Now that you know what payroll accounting is and why it matters, you may wonder how to get started.