What Is a Payroll Liability and How to Account for It?

Payroll liabilities are financial obligations employers incur when compensating their workforce. These amounts are owed to employees, government agencies, and third-party benefit providers. They accumulate each time payroll is processed and remain on a company’s books until paid, typically within a few weeks.

Common Types of Payroll Liabilities

Payroll liabilities include amounts withheld from employee wages and taxes employers must pay. Employee withholdings include federal income tax, deducted based on an employee’s W-4 form. Some states and local jurisdictions also require income tax to be withheld.

Federal Insurance Contributions Act (FICA) taxes are also withheld, funding Social Security and Medicare programs. These include Social Security tax, typically at 6.2% of wages up to an annual limit, and Medicare tax, typically at 1.45% of all wages. An additional Medicare tax applies to wages exceeding certain thresholds.

Employers also pay their share of payroll taxes. They must match the employee’s portion of FICA taxes. Additionally, employers pay Federal Unemployment Tax Act (FUTA) taxes, which help fund unemployment benefits. State Unemployment Tax Act (SUTA) taxes are also paid by employers, with rates varying by state.

Beyond taxes, payroll liabilities include other amounts deducted from employee pay or accrued by the employer. These involve employee contributions to health insurance premiums or retirement plans. Wage garnishments, mandated by court orders, also create payroll liabilities that must be withheld and remitted. Accrued wages, vacation pay, or sick leave that employees have earned but not yet been paid for represent liabilities until disbursed.

Accounting for Payroll Liabilities

Businesses record payroll liabilities in their financial records using the accrual method of accounting. This approach recognizes expenses when incurred, regardless of when cash changes hands. As employees perform work and earn wages, and as associated taxes and deductions accumulate, these amounts are immediately recognized as liabilities.

When recording these liabilities, a company debits appropriate expense accounts, such as Wage Expense or Payroll Tax Expense, to reflect the cost incurred. Simultaneously, various liability accounts are credited to show the amounts owed. For instance, withholdings for federal income tax are credited to a “Federal Income Tax Payable” account. The employer’s portion of FICA taxes increases a “FICA Taxes Payable” account.

These recorded payroll liabilities are classified as current liabilities on a company’s balance sheet. This indicates that the obligations are expected to be settled within one year or one operating cycle, whichever is longer. Maintaining accurate records of these liabilities is important for financial reporting and compliance with tax regulations.

Remitting Payroll Liabilities

Once payroll liabilities are accounted for, employers must remit these funds to the appropriate entities by specific deadlines. Federal payroll taxes, including withheld income tax and FICA taxes, are generally deposited with the U.S. Treasury via the Electronic Federal Tax Payment System (EFTPS). Employers report these quarterly liabilities using IRS Form 941.

Federal unemployment taxes (FUTA) are typically paid quarterly if the accumulated liability exceeds $500, with any remaining balance due annually. Employers report FUTA taxes on IRS Form 940. State and local tax liabilities, such as state income tax and state unemployment tax, have their own distinct payment schedules and reporting requirements.

Other withheld amounts, like health insurance premiums or retirement plan contributions, are remitted directly to the respective third-party providers. Wage garnishments are sent to the court or agency that issued the order. Most payments to federal agencies can be made electronically through EFTPS, which helps ensure timely payments and supports compliance.