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Payroll Liabilities vs Payroll Expenses: What Are the Differences?

The result is one place where you can manage multiple services. Say you wanted to see how much you spent on employee payroll last year, as opposed to the year before. All the wages you’d be ...

Payroll Liabilities vs Payroll Expenses: What Are the Differences?

The result is one place where you can manage multiple services. Say you wanted to see how much you spent on employee payroll last year, as opposed to the year before. All the wages you’d be looking at are payroll expenses (i.e., wages that you have already paid). Recall our previous example of employees getting paid on January 17, from work they did January 2-15. On January 17, once employee wages are fully paid, those liabilities become expenses. Accrued wages for a certain period are recorded at the end of your accounting period.

Deductions for state and federal income tax withholdings

  1. “One of the best practices of a company to keep their payroll clean is to be tracking it when those checks become stale-dated,” Bucholtz said.
  2. “You’ll be left holding the bag as a company when the audit comes,” she noted.
  3. Payroll accounting provides you with a record of tax obligations and legal obligations.

QuickBooks Online was considered the best overall software, while Xero was considered the best for micro-business owners. FreshBooks was best for service-based businesses, and QuickBooks Self-Employed was best for part-time freelancers, but Wave was the best free software. In lieu of using specialized payroll services, some companies opt to rely on payroll software programs. Once the company purchases the software, there are no additional monthly fees.

Employee Wages

Companies typically will use their short-term assets or current assets such as cash to pay them. The company must pay both the net pay amounts to employees and the employer expense amounts. They can pay it either by check, direct deposit, or electronic transfer. They must also record these payments to accurately update the company’s cash balance. If you use a payroll service, you can save time and process payroll correctly. A worker’s classification determines how you treat them for tax purposes.

Any Voluntary Deductions Must Be Taken From the Remaining Wages

After subtracting some of the most common payroll taxes, the employee’s wages payable or “take-home” pay is $925. Businesses should stay up to date on their payroll accounting, both for their financial knowledge and to stay compliant with government regulations. If your business is ever audited, you need records of your taxes and employee compensation. One way to record payroll is to use a series of journal entries. Instead of time-consuming manual payroll processes, some organizations opt for payroll software. Modern payroll services provide companies and employees with a cloud-based portal where they can set up and view their benefits and salaries.

How to Do Payroll Accounting: A Step-by-Step Guide for Employers

Benefits paid on a monthly basis are often called welfare benefits. To reflect your obligation, your business will record a $25 Health Insurance Premiums Payable for each employee at every payroll run. Make sure they include dates so you know when you incurred your liabilities and when they’re due. Businesses must file a number of forms to pay payroll liabilities. Payroll taxes are paid for by the employer, such as the employer’s share of Medicare and Social Security tax set up by the Federal Insurance Contributions Act, or FICA. Keep copies of all documents related to payroll to remain organized and up-to-date.

Software programs usually include printable tax forms and withholding tables. The payroll service may also maintain a record of how much vacation or personal time employees have used. 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. Several withholdings and deductions are taken out of an employee’s gross pay.

However, you’re required to withhold taxes on employee pay based on information the worker provides on Form W-4. If you opt for a full-service payroll company, you also don’t have to stress about depositing payroll tax liability. Other types of employees may include contractors and freelancers, who typically charge an hourly rate. Here’s a quick guide on the different types of payroll liabilities, how to pay them, and best practices to ensure you never run into any accounting problems. Bucholtz also touched on key reporting responsibilities for unclaimed wages, by providing California as an example of a state with a unique reporting method. California has a two-part reporting method with an initial report due in October, while the final “Remit Report” is due June 15.

Review the report, so you can post each adjusted journal entry. However, if you have only salaried employees, your payroll expenses will be more predictable. Money paid to employees as part of a PTO plan also counts as a payroll liability. Unpaid employee wages make up the largest part of your pay-related liabilities. If you hire hourly employees, this amount can change each pay period based on how many hours each employee works. In 2020, the IRS assessed about $6 billion in employer penalties.

Aside from saving time, it can also reduce the chances of errors. Familiarize yourself with the deadlines for remitting payroll taxes to the appropriate tax authorities. Keep track of different due dates for federal, state, and local taxes to ensure compliance and avoid penalties. Thus payroll liabilities are usually a subset of payroll expenses. For instance, a small business with one or two employees may not offer 401(k) matching or even health insurance. By contrast, some employers may have additional accounts to add, like a fitness credit or education reimbursement.

Another way to keep track of liabilities is to use payroll accounting. This will give a business a clear record of liabilities, including taxes and wages. It will also demonstrate whether you’ve paid payroll expenses or not.

If you have a proper payroll system, you can calculate the gross pay and withholdings for each employee automatically. Done right, you’ll be able to get an overview of all payroll-related expenses and transactions. Payroll accounting lets you maintain a record of employee costs. This way, you can determine business-related expenses capitalized interest overview & rules what is capitalized interest video & lesson transcript related to labor costs. Also, it allows you to determine the cost of hiring more full-time employees, part-time workers, consultants or freelance contractors. Running payroll reports and analyzing them monthly will help you create an accurate budget, understand your labor costs and manage your small business’s cash flow.

Keeping a PTO liability account offers more benefits than just knowing when your employees have taken a day off. The main reason to keep track of employee PTO is knowing exactly how much money you will have on hand if an employee quits without using their PTO. Other fringe benefits that employees pay through their paychecks, such as commuting benefits, also count as payroll liabilities.

what are payroll liabilities

Throughout her career, Heather has worked to help hundreds of small business owners in managing many aspects of their business, from bookkeeping to accounting to HR. Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry. Her experience has allowed her to learn first hand what the payroll needs are for small business owners. If you’re overwhelmed with the many aspects of learning how to do payroll accounting, you’re not alone.

The only difference is there’s more pressure to get the math right. 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.

Let’s look at the reasons why accurate payroll accounting matters. To keep your employees and reduce turnover, you must pay them real wages on time. We collaborate with business-to-business vendors, connecting them with potential buyers.

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