What is Included in Payroll Liability? – Small Business

Our related article explores the five most common payroll liabilities that companies must address to remain legally compliant and accurate with their payroll and recordkeeping. In this article, we’ll discuss additional payroll costs that are commonly overlooked, and walk you through the potential financial and legal repercussions of noncompliance.

We’re here to help your small business simplify payroll so you can focus on your mission and bypass the burdens that IRS penalties, inaccurate budgeting, or legal action from employees represent.


Forms of Payroll Liability

To recap, payroll liability is essentially any payroll-related payment that your company owes but has not paid. The major categories of payroll liability include wages owed to employees, benefit plan contributions, withheld taxes, wage garnishments, and even PTO “rollover” after an employee has resigned. These owed payments can affect future budgeting and, if left unresolved, negatively impact your payroll process. 

Although small businesses may not be burdened by some of the additional payroll liabilities larger companies face (for instance, union dues or company stock purchases), here are some additional payroll liabilities that might fly under the radar:

  • Savings account deposits
  • Loan payments
  • Charitable contributions
  • Alimony payments

Bear in mind that even these “secondary” categories of contributions and withholdings, which vary from employee to employee, remain payroll liabilities until you have transferred money to the appropriate agencies. 

Additionally, although it’s tempting to lump withheld FICA, FUTA, and SUTA taxes into one fixed category, the reality is that state and local tax policies vary greatly area by area, so you must be aware of newly introduced tax and labor laws to ensure full compliance, whether it’s a transit tax or a legislative update regarding overtime, paid breaks, or vacation time. 

Similarly, policies related to FICA-specific taxes on Social Security and Medicare are periodically updated at the federal level and these policy updates must be reflected in your payroll and accounting practices.

Staying on Schedule

Depositing timelines for small businesses vary based on the category of taxes and withholdings. For instance, while federal unemployment tax must be deposited every quarter, federal income, Medicare taxes, and Social Security deposits could be due semiweekly, monthly, or even annually depending on your business's annual tax liability and IRS lookback period. Along the way, your business must report all payroll taxes to the IRS and other necessary tax agencies.

State policies differ regarding deposit timelines, including state unemployment tax and other taxes that are specific to the state where your business operates.

Financial and Legal Repercussions of Noncompliance

Businesses that fail to accurately pay payroll taxes are billed by the IRS, usually in tandem with a penalty. Civil and criminal penalties vary based on the severity, scale, or perceived deliberateness of the violation(s). 

Remember that you may be subject to additional fines or penalties if your reports are late, as well. Overall, IRS charges are dictated by how late your payment is and how much you owe. Bear in mind that these charges are also subject to interest rates of 3-6% of the unpaid sum.

Some basic rules and penalty percentages apply. Payroll taxes that are 1-5 days late pay a penalty of 2%; for 6-15 days, the penalty is 5%; and for 16 or more days, the penalty is 10% of the total owed. Businesses must also pay a 15% penalty for nonpayment if they fail to pay earlier than 10 days after receiving their first IRS bill/notification.

Of course, in extreme cases, businesses could face tax liens, significant fines, or even jail time if they completely ignore these payments or are clearly guilty of tax evasion. Similarly, current or former employees may pursue legal action as a consequence of even minor payroll errors, which can sometimes lead to business-wide audits (and still further fines).

Compliance and Stress-Free Payroll with Workforce PayHub

Looking to simplify your entire payroll process while ensuring accuracy? Our payroll solution is just one module within our human capital management (HCM) suite. It continually processes payroll for companies in Michigan and throughout the Great Lakes in real time, so it’s always ready to support your business at the click of a button. 

Regardless of your industry, Workforce PayHub’s optimized payroll software and expert support help you ensure full compliance, avoid penalties, and empowers you to focus on your company’s core mission. Ready to enjoy stress-free payroll processing? Contact us today to start our collaboration.

Eric Jones
Reconciling the General Ledger to Your Payroll Register New Michigan Laws - Minimum Wage + Overtime Laws
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