All companies have financial obligations they must pay, and if you’re an employer, one of those is payroll liabilities. Without a doubt, you should not neglect or delay paying any of these liabilities. Doing so could create bad relationships between you and your employees while also exposing you to legal actions and fines for non-compliance.
This guide will help you better understand payroll liabilities by looking at different types of liabilities and how you can better track and pay them - particularly if you have a global team.
Payroll Liabilities Definition
Payroll liabilities are any type of payment you need to make that relates to your payroll. That includes any payroll costs you have not yet paid. Some examples include taxes withheld from employees, wages your employees have earned but you have not paid for yet, and other costs. Most often, you will pay payroll liabilities rather quickly, meaning they do not typically stick around for a long time.
Types of Payroll Liabilities
When employers decide on how to do payroll, they also need to understand all the payroll liabilities they have. Each one represents money that your business has to pay out in the future - usually within a short time. Here are some of the most common liabilities you need to keep in mind.
Employee Wages
Your employee wages are a type of payroll liability. When you run payroll, you are taking the steps necessary to pay your employees, and the wages you pay are a type of liability you owe. Employees receive payment for the work they did in a specific pay period, and are typically paid on a weekly, biweekly, semimonthly, or monthly payroll schedule. Any work employees perform but haven’t yet been compensated for is considered a liability.
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Paid Time Off
If you provide your employees with paid time off (PTO) or any other types of leave, that is also a payroll liability you also need to consider. Although you may not have employees taking time off every pay period, you are still liable to cover those expenses whenever they do decide to take time off. Employers are also liable for keeping track of how much time off employees accrue and ensuring that employees know how much PTO is available to them.
Payroll Taxes
Payroll taxes are one of the most important payroll liabilities. Most employers must withhold money from employee paychecks to remit to the appropriate tax collection agency. Some examples of payroll tax liabilities include:
- Income taxes
- Social security
- Healthcare taxes
- Benefits contributions (e.g., pensions)
Employers must contribute employer taxes to various tax agencies and third-party benefits providers too. Part of the payroll process is gathering taxes relating to employee wages and benefits and your contribution to them. Then, you will need to hold onto those funds until your deposit date. You do not immediately deposit these with the taxing authority but do so on a date and schedule specified by the local authority).
Voluntary Deductions
Voluntary deductions represent specific items above the statutory minimum that the employee wants to pay out of their paycheck. These deductions typically go towards employee benefits like:
If your employees elect these services, you must hold onto the funds collected from their wages until it is appropriate to pay for those services.
How to Pay Liabilities
You need to make payment for any of your liabilities to the associated recipient as per their payment terms and schedule. Requirements for paying liabilities will vary by location, so understanding your obligations as an employer is essential. Here are the main steps to paying payroll liabilities:
- Pay net wages to workers and issue employees a payroll stub.
- Pay income taxes and contributions to the appropriate collection agency(s) or third-party benefits provider.
- File the necessary forms required for reporting certain taxes.
How to Track Payroll Liabilities
There are a lot of factors to consider when it comes to payroll liabilities. Keeping track of them may seem like a complex process because there are several things you need to do.
You must ensure you meet all requirements regarding pay rates, overtime hours paid, and minimum wage standards that apply to your employees. These requirements vary by country and municipality, so make sure you’re aware of your obligations as an employer.
You have a few options to consider when deciding how to track your payroll liabilities. Using payroll software in-house can help you track these liabilities and manage them over time. Keep in mind that if you choose to keep your payroll in-house, you will be responsible for collecting, managing, and making the payments. Many organizations open a secondary account as their payroll account. This helps ensure that the money needed to cover your payroll liabilities is not mixed with regular funds.
Alternatively, global payroll or Employer of Record (EOR)providers, like Omnipresent, calculate, withold, and pay your international payroll liabilities on your behalf and send you an invoice to cover the costs. This helps you easily navigate varying local requirements and regulations.
Payroll Liabilities FAQs
Here are a few additional questions you might still have regarding payroll liabilities.
What Are Payroll Liabilities Vs Payroll Expenses?
As we’ve already discussed, payroll liabilities are any outstanding payments you owe related to the costs of running payroll. Payroll expenses, on the other hand, are the payments you make to cover your payroll costs. In other words, until the costs associated with running payroll are paid, they’re liabilities. Once these costs have been paid, they’re expenses.
Which Method Is Best for Tracking Payroll Liabilities?
Many companies still use a manual tracking method. This allows you to enter information into your payroll software and accounting tools. However, this method can introduce plenty of human-related errors. Automated tracking is a bit more advanced but can reduce some of the frustrations you have.
If you have staff working in various countries, tracking liabilities can be even more complicated. In this case, you can turn to a global payroll solution provider, like Omnipresent, to manage all aspects of your payroll process, including tracking liabilities.
