Payroll Liabilities

Written by Eddy Hood

As a small business, you want to encounter as few problems as possible when it comes to paying your employees. One of the first steps toward minimizing problems is to understand the details of how your payroll accounts work. Payroll liabilities are an important part of your accounting system that stems from the pay that employees receive in the form of their paychecks. Although you will ideally want to hire a reliable firm such as Ignite Spot to manage your payroll and your payroll liabilities, it is also important for you as a business owner to understand how your accounting system works. This means understanding what payroll liability means and how it should be managed.

Payroll is recorded in an expense account and in a liability account. Each pay period, your employees are paid for their work according to their salary or hourly wage. The amount that you owe your employees per pay period, also known as their gross pay, is an expense and is therefore recorded on the payroll expense account. This is different from your payroll liabilities. Your payroll liabilities are deductions and withholdings that are taken from your employees' gross pay. These deductions are money that is owed to a third party. Some of these deductions are mandatory and must be withheld. Other withholdings may be deductions that the employee has chosen to voluntarily make.

Examples of both mandatory and voluntary deductions that may be recorded on the payroll liability account include health or dental insurance, federal taxes, contributions to retirement accounts, alimony and child support garnishments, and any union dues. State taxes and half of the Federal Insurance Contribution Act, or FICA taxes, are also withheld from an employee's wages. The FICA tax includes taxes for both Medicare and Social Security. It is up to you as the employer to use the deductions to pay the appropriate entity, such as the IRS for federal taxes. The amount of income tax deductions that are taken from an employee's paycheck is determined by the employee's withholding allowance and government tax tables. The number of withholdings is indicated by employees on their completed W-4.

Income tax deductions are federal, but may also include state income taxes and local taxes as well. Once the deductions have been made, the remaining pay is what you will actually pay your employees. This amount, the employees' take home pay, is called their net pay. As an employer you must also pay your half of the employee's FICA taxes. You will also need to pay for their unemployment insurance premiums. These payroll tax expenses must also be recorded in your payroll liability account.

Turn to Ignite Spot for your online bookkeeping needs. As your outsourced accounting firm, we can manage your payroll liabilities, and we also offer complete payroll services. Find out how we can save you time by filling out our online form  for a free quote and a phone meeting with one of our knowledgeable staff members. You may also download our pricing guide or call us with any questions that you may have.

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