The 5 Most Common Payroll Liabilities to Watch Out for

Any payroll-related payment that your company owes but has failed to pay (or must pay at a future date) qualifies as a payroll liability. From wages owed to an employee to benefit plan contributions and withheld taxes, payroll liabilities can majorly impact budgeting and the efficacy of your payroll process. 

Whether you already use a payroll system, handle payroll in-house, or haven’t decided on a lasting payroll solution, we’re here to walk you through the 5 most common payroll liabilities. Our goal is to help you develop or refine your long-term budgeting and payroll strategy to find a process that works for you.

Employee Compensation

Whether your employees are salaried, hourly, or independent contractors, it’s easy to miss or mismanage some payroll liabilities related to employee compensation. For instance, a salaried worker might be owed (including retroactively owed) bonuses or incentive compensation. Similarly, you may have a lingering obligation to pay overtime hours to an hourly employee or still need to square up with an independent contractor. 

Even the basic concern of withheld taxes on employee pay can become more burdensome depending on your business’ size, or which other payroll-related concerns you’re addressing.

Paid Time Off (PTO)

This is a slightly more “under the radar” payroll liability, but we recommend calculating PTO within your accounting software to determine how much is owed to an employee if they resign without using their paid time off. Accounting for this depends on the policies within your company, namely whether unused PTO rolls over into the new year, PTO is unlimited, or PTO roll over is not permitted. Regardless, businesses should budget for this possible expense annually.

Voluntary Deductions: Retirement Plan and Healthcare Contributions 

Many employees voluntarily enroll in health, vision, dental, and life insurance, or 401(k) retirement plans, making contributions with some of their pre-tax earnings. Before you forward these payments or contributions to a provider on your employees’ behalf, the funds are in your account(s) and a liability. Similarly, some fringe benefits and other deductions like union dues qualify as payroll liabilities.

Wage Garnishment

In certain circumstances, employers may be legally obligated to withhold a portion of an employee’s paycheck to pay for outstanding debts for student loans, consumer debt, or child support. Since a portion of wages must be sent to a third-party, employers are obligated to make two separate payments: one to a debt collector and the other to their employee. 

As with contributions to 401(k) retirement plans and other benefits, it’s advisable to set up a distinct Payable account to keep those funds separated for your accounting and payroll purposes.

Payroll Taxes & Service Costs

It’s essential for businesses to create payroll liability accounts for each type of tax that is withheld, whether it’s to fund Medicare & Social Security (FICA) taxes, federal/state income tax, FUTA taxes, workers compensation, or otherwise. Bear in mind that state labor laws regarding benefits, fringe benefits, mandatory workers compensation, and state income tax vary from state to state and are frequently updated. 

Regardless of your industry or the location of your business, you’ll need optimized payroll software to remit all forms of payroll taxes to the applicable authorities in an efficient and consistent way. Until that process is streamlined, you risk being burdened with payroll liabilities that are disorganized or intermingled with normal operational accounts.

Avoid Penalties for Noncompliance and Simplify Your Payroll Process

Single or recurring issues with payroll liabilities can lead to steep IRS penalties, dissatisfied employees, and poor budgeting practices that hurt your business.

Although your business can take a number of preventative steps to address payroll liabilities, the most important step is partnering with a reliable payroll system that keeps accurate records, sets regular reminders, establishes discrete Payable accounts, schedules deposits as needed, and keeps payroll processing streamlined and issue-free from the start.

Are you looking to simplify your entire payroll process while ensuring accuracy and efficiency? Our payroll solution is just one module within our comprehensive human capital management (HCM) suite. We continually process payroll for companies in Michigan and throughout the Great Lakes Region. Our real-time software is ready and accessible at the push of a button, and supported by experts in state and federal labor law compliance.

Ready to get started? Contact us today to start our collaboration and permanently resolve your payroll liability concerns.