Bookkeeping What Is Payroll Accounting? The Ultimate Guide

What Is Payroll Accounting? The Ultimate Guide

payroll liability

In fact, in most cases it’s illegal not to have workers’ compensation insurance to cover salary loss and medical expenses. Protecting your payroll with workers’ compensation and employer’s liability insurance is not only legally required in many cases, it’s also beneficial to your business. Record your payroll liabilities based on the accounting principle of the accrual method.

  • Not paying payroll liabilities, or not doing so on time, can be costly.
  • This information is used to create financial journal entries recorded on a GL for financial reporting and business-related purposes.
  • Eddy is the all-in-one HR Suite built to help local businesses easily manage their people, payroll, and hiring processes.
  • For extra protection, such insurance can be coupled with workers’ compensation insurance.
  • You have a few options to consider when deciding how to track your payroll liabilities.

The obligation is fulfilled whenever your insurance premiums are due, as set by your provider. Natalie is a writer with experience in operations, HR, and training & development within the software, healthcare, and financial services sectors. Benefits paid as a lump sum usually include contributions that an employer makes to things like retirement plans. Benefits paid on a monthly basis are often called welfare benefits. If your company provides benefits to its employees, then you will have to provide Health Insurance or some other type of benefit.

What are Payroll Liabilities & How to Track Them

By tracking liabilities, businesses can ensure all (PE) are being paid on time and in full. Understanding how payroll taxes affect your company’s bottom line helps you make smart decisions about spending, investments, and hiring needs. Adjusting payroll liabilities refers to correcting a mistake in accounting and reporting (usually software). How to complete this task varies depending on the method or software used.

payroll liability

Taxes are withheld from pay to fund income tax, Social Security, and Medicare tax liabilities. Payroll liabilities are payroll-related obligations that you need to make for your company. Employee-earned earnings that have yet to be paid, employee taxes, and payroll service charges are examples of liabilities. Thus payroll liabilities are usually a subset of payroll expenses.


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. Every business will have some payroll liabilities, but what are they, and what’s the best way to keep track of and manage your liabilities? Instead of writing a full paycheck to an employee, you write two checks — one to the employee and one to the debt collector. Set up a Garnishment Payable account for the time between the end of the pay period and when you send out the garnishment check.

  • Salaried employee compensation should go in a Salaries Payable account, and hourly employee pay goes in a Wages Payable account.
  • Daniel Eisner is a payroll specialist with over a decade of practical experience in senior accounting positions.
  • Salaried employees divide their annual salary by the number of pay periods in a year.
  • Because these liabilities represent money you must pay out at a future date, they can be easy to overlook.

This step is important because payroll tax liabilities and voluntary deductions are based on a percentage of the employee’s gross wages. Gross wages include but are not limited to items such as commission, overtime pay, piece rate pay, tips, and bonuses. It might feel like there are a hundred kinds of payroll taxes. From Social Security and Medicare to state and federal unemployment taxes, the list goes on and on. As a business owner, it’s your job to pay your share of the taxes and manage tax withholdings from employee paychecks. And until all those taxes are deposited to their final destinations, they’re payroll liabilities.

What are payroll liabilities? Definition and types

Most payroll software solutions are affordable, considering they automate processes and eliminate human error. Payroll software can also help automate employee onboarding, company training, tax filing, payroll and deduction errors, and more. Keeping a PTO liability account offers more benefits than just knowing when your employees have taken a day off. The main reason to keep track of employee PTO is knowing exactly how much money you will have on hand if an employee quits without using their PTO. As an employer, you do not have tax liabilities when working with contractors or freelancers.

An employer must purchase workers’ compensation insurance if the state requires it. This insurance protects your company from lost revenue if a worker gets hurt on the job. There are different rules for withholding and free accounting services contract template paying state income tax depending on the state. If your business does not allow PTO to roll over, then PTO accruals are negated at the end of the year. The same goes for if your business has an unlimited PTO policy.

Payroll Liability Definition

This includes restaurants that make food deliveries, sales workers who drive to meet clients, and companies with full fleets of delivery vans or work trucks. Professional liability insurance is intended for businesses that provide certain kinds of services to clients. Accurately tracking your liabilities lets you stay in compliance with state and federal laws. As well as protect your business with accurate information to support tax audit documents if needed. Once this is done, any necessary liability adjustments can be made to ensure payroll liability accuracy. Taking a few moments to ensure payroll accuracy from the beginning can save valuable time down the line dealing with discrepancies or outright payment issues.


Do you need commercial property insurance if you have general liability insurance? Yes, as these forms of insurance cover slightly different things. Furthermore, this software is reliable and will ensure that your payments are always at the right time, giving you one less thing to stress about. Eddy is the all-in-one HR Suite built to help local businesses easily manage their people, payroll, and hiring processes. Next, account for voluntary deductions such as health and dental insurance.

Related Posts