You might find it challenging to keep up with the complicated nature of payroll processing. It’s crucial to keep track of your payroll liabilities and make timely payments. Payroll liabilities are produced when there are unpaid salaries or payroll deductions. Let’s begin with the fundamentals.
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Payroll liabilities: What are they?
A liability in accounting is the duty to make a payment. Your business has two different sorts of payroll obligations when you manage payroll:
Payroll liabilities are the total gross wages owing to workers and independent contractors.
Amounts withheld: Amounts withheld from employee pay for income taxes must be sent to the IRS and state revenue offices. Payroll obligations are sums that have been withheld but not yet sent. However, keep in mind that money withheld from an employee by a company is not considered a payroll expense.
Payroll costs: Some payroll obligations are not deducted from employees’ wages. For instance, when payroll is completed, the employer’s portion of Social Security and Medicare taxes becomes a liability. The liability is changed to an expense account when the payments are made.
You provide reports that describe the payments’ purpose when you submit payments (employee name, amounts withheld, etc.). There could be dozens of balance-sheet account numbers in your company’s payroll-liabilities chart of accounts.
Payroll liability types
Payroll liabilities are produced by employee remuneration, taxes, and voluntarily made deductions. Employers also have payroll obligations for FICA (the Federal Insurance Contribution Act) tax and other costs.
Payroll liabilities are the sum of the gross wages owing to employees and independent contractors. Liability can be determined in a number of ways for a particular pay period:
Salaried workers: The portion of the annual wage due for the pay period, including any bonuses or other incentive payments.
Hourly employees: This responsibility equals the entire number of hours worked times the hourly wage, including overtime hours. Additionally, hourly workers may receive incentive pay.
Independent contractors (freelancers): Amounts due are determined by a fixed charge or an agreed-upon hourly rate.
On the pay given to independent contractors, no taxes are deducted. However, depending on the data the employee supplies on Form W-4, you must withhold taxes from the employee’s compensation.
Payroll taxes and insurance
Payroll taxes are deducted to cover the costs of Medicare, Social Security, and income taxes. Some of these levies cost employers’ money.
Federal income tax withholdings: Based on the employee’s yearly income and filing status, certain amounts are withheld (married, single, etc.).
FICA taxes: The levies taken to pay for Medicare and Social Security taxes Employers and employees both paid a 7.65% FICA tax rate on the worker’s gross wages for the tax year 2020, and the worker’s taxes were deducted from gross pay. A self-employed person must file a personal tax return and deduct half of the self-employment taxes in addition to paying the employer and worker portions (15.3%).
State income taxes: Various states have different withholding and payment rules, and other states don’t have any state income taxes at all.
Both the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) were passed to give workers who lose their jobs—typically when the employee is not at fault—temporary income. Through a cooperative federal-state arrangement, businesses pay unemployment insurance payments; only employers are responsible for paying FUTA taxes.
Workers’ compensation insurance: Depending on state regulations, businesses may be required to obtain workers’ compensation insurance. When a worker is hurt at work, the insurance plan covers medical expenses and missed wages. Employers are responsible for paying workers’ compensation premiums, and the price depends on the sector and the number of employees.
Garnishments on wages: A garnishment is a court-ordered necessity to deduct money from an employee’s pay and send it to a third party.
As your company expands, you might provide benefit plans to entice staff. Employees have the option to voluntarily deduct money from their paychecks to pay for benefit plans.
Payroll withholding pays for health insurance premiums, retirement plan contributions, and other benefit plans. The cost borne by the employer is a payroll expense.
- Plans for retirement: Employee contributions are deducted from wages; they are not an expense of the business. However, the employer’s portion of the contributions is a payroll expense.
- Premiums for health, dental, vision, and life insurance are paid by the employer and are considered business expenditures rather than being deducted from wages. The employee’s portion of premiums is not a payroll expense; it is withdrawn from salary.
- Union dues: On behalf of the employee, union dues are withheld from salary and sent to the organisation.
Loan payments withheld from salary in the event that a worker repays an employer loan are not considered payroll liabilities or payroll expenses. Instead, the payment raises the employer’s cash account and lowers an asset account for loan receivables.
Costs of payroll services
A business expense is the cost of hiring an accountant or a payroll service provider.
As was previously mentioned, when payments are made to a third party, some payroll liabilities are reclassified into a payroll cost account.
Payroll obligations versus payroll costs
Every business must use the accrual method of accounting, which balances revenue received with expenses incurred, to record payroll liabilities and payroll costs. Regardless of when the costs are paid in cash, the accrual approach tracks payroll expenses in the month they are incurred. A more precise representation of firm profit is provided by the matching notion.
Recognizing the accrual accounting approach
Assume that the next pay date is April 5 and that a restaurant owes employees $3,000 in wages for the final five days of March. On March 31, the accrual method is used to post $3,000 in wage expenses and a $3,000 rise in wages payable (a payroll liability account).
Payroll processing on April 5 results in a $3,000 reduction in cash and a $3,000 reduction in wages payable. The cost was recorded in March, the month when the restaurant staff worked those hours. The $3,000 in payroll expenditures are included in the match between revenue and spending for the month of March.
Calculating Payroll Obligations and payroll costs
Payroll liabilities and expenses are posted using the accrual technique in the same period. In the restaurant example, on March 31, there is a $3,000 wage expense and a $3,000 wage obligation balance. The liability balance is decreased on April 5 when cash is received.
The so-called “cash basis” technique of accounting, which does not record expenses based on cash inflows and outflows, is used instead. The cash approach gives a misleading picture of firm earnings; hence, no corporation should use it.
To pay payroll liabilities, businesses must submit a number of forms.
How to cover your payroll liabilities ?
The most typical payroll liabilities and how they are paid are listed below:
- Employees receive their gross wages via check or direct deposit.
- Federal income taxes: Businesses report and submit their federal tax withholdings using Form 941.
- FICA (Medicare and Social Security taxes): Companies report and submit these tax payments using Form 941.
- These payments are reported and submitted using Form 940, the employer’s yearly federal unemployment (FUTA) tax return.
To settle all payroll obligations, take the following actions:
- Gather employee information for Form W-4 (for employees).
- Utilize a worker’s contract, hourly data, or salary to determine gross pay.
- Calculate the necessary deductions, if any.
- Compensation is each employee’s net pay after deductions are made.
- Payroll liabilities for sums that will be spent on business expenses should be recorded. For instance, the employer’s portion of FICA taxes
- Use the appropriate reporting form to submit the appropriate amounts to each third party.
- Payroll liability balances should be reclassified as payroll cost accounts.
- Your payroll estimates could change from one pay period to the next due to the following factors, which would likewise alter payroll liabilities and costs:
Tax law changes
Personnel who have been hired, elevated, or discharged
Employees who alter their tax and benefit withholdings in response to changes in their salaries or families
Businesses must also abide by the rules on payroll record-keeping.
Ensure that you are abiding by the following documentation requirements as well as all applicable laws and regulations:
- The Fair Labor Standards Act (FLSA) sets standards for overtime hours, various pay rates, and the minimum wage. Payroll records must be maintained for a minimum of three years, according to FSLA.
- The pay and overtime rates specified in the collective bargaining agreement with the union must be followed if you employ union employees. Records of union compensation must also be preserved.
- There are rules governing employment documentation in each state that must be complied with.
How to change payroll liabilities ?
Accountants enter adjustments for several payroll-related transactions, including:
- You change the payroll records by reducing a payroll obligation account and by reducing cash when amounts withheld are sent to a third party.
- Firms reduce wages payable in the same way that they cut cash when workers receive their due wages.
- Every time you process payroll, create a payroll-liability balance report using payroll software. After reviewing the report, post each revised diary item. Account reconciliations are necessary for accounting.
Managing Payroll Obligations
Payroll obligations are reconciled by comparing information from the following sources:
- Employee data (pay rates, hours worked)
- submitting payroll taxes (income taxes, FICA taxes)
- Payroll taxes are deducted from wages and deposited as taxes.
- Banking operations (payments to workers and to third parties)
- Monetary records (transactions posted)
The amounts produced throughout the payroll process must be the same in order to properly post payroll liabilities. Take employee federal income tax withholdings as an illustration:
- The employee will have $150 in federal tax withheld on March 1 based on their gross pay and the details on their Form W-4.
- The company is required to deduct $150 and submit the sum to the IRS.
- The IRS must receive a deposit of $150.
- The employee’s federal tax withholding for the year must be increased by $150 and shown on the employee’s Form W-2.
The amount withheld and paid to the IRS must be documented in the accounting records.
Payroll software can be used to verify that you are processing payroll accurately by reconciling the payroll liability data. The most time-consuming accounting chore is payroll; therefore, using the correct tools is essential. Automate the payroll procedure to save time and concentrate on expanding your company.