What is Payroll Liabilities?
Payroll liabilities are amounts a business owes from payroll, such as withheld taxes, employer taxes and benefit deductions, until they are paid.
Every payroll creates obligations beyond the net pay deposited to employees. Until those amounts are paid to the government or benefit providers, they are liabilities on the balance sheet.
Common payroll liabilities
- Federal income tax withheld
- Employee and employer Social Security and Medicare taxes; see FICA tax
- Federal unemployment tax; see Form 940
- State income tax withheld and state unemployment tax; see SUTA
- Retirement plan deferrals and loan repayments
- Health insurance and other benefit deductions
- Wage garnishments
- Accrued wages earned but not yet paid
Why reconciliation matters
Payroll liability accounts should return to zero, or show only the current period's unpaid amounts, after each deposit. A growing balance means either a deposit was missed or deposits were recorded incorrectly. Missed deposits of withheld taxes can create personal liability; see the trust fund recovery penalty.
Common errors
- Recording payroll tax deposits as expenses while the payroll entry also records the expense, doubling it
- Recording only net pay, leaving liabilities unrecorded
- Retirement deferrals withheld but not remitted promptly to the plan
Monthly reconciliation
- Compare each liability account with the payroll register and deposit confirmations
- Confirm federal deposits through EFTPS history
- Investigate any balance older than the current period
The IRS describes deposit requirements in Publication 15. See also gross pay and net pay and our payroll services.
Related terms
- Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
- FICA Tax: FICA tax is the Social Security and Medicare tax paid on wages, shared between employers and employees.
- SUTA (State Unemployment Tax): SUTA is the state unemployment insurance tax employers pay on wages, at a rate set by each state.
- Gross Pay and Net Pay: Gross pay is an employee's total earnings before deductions; net pay is the amount actually paid after taxes and deductions.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Are payroll taxes an expense or a liability?
Employer taxes are an expense when incurred. Both employer taxes and amounts withheld from employees are liabilities until deposited.
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