According to federal rules, every employee must provide accurate information on the W-4 form to ensure they pay the correct taxes. Nevertheless, only 45% of American employees update their tax documents.
What does it mean for employers? Incomplete or missing details on the W-4 form can lead to incorrect tax calculations. So, it’s critical to understand and track payroll liabilities for your workers to ensure you stick to the law.
At NoHQ, we want to ensure you grasp your labor-related matters so that you focus on business growth.
Now, let's dive into payroll liabilities, why they are important, and how to monitor them.
What Are Payroll Liabilities?
Payroll liabilities are payroll payments your company incurs but has not yet paid. They represent a financial commitment. A few examples include taxes withheld, wages payable, and other payroll-related expenses.
Your payroll liabilities chart of accounts also shows the outstanding amounts you must settle. Once you pay them, these debts do not carry over to the next month.
Payroll liabilities are crucial because a business that fails to comply with the Internal Revenue Service (IRS) can pay enormous fines. For example, the IRS collected a whopping $6 billion in penalties in 2020 due to tax miscalculations.
Different Types of Payroll Liabilities
Payroll Taxes
According to the National Federation of Independent Business, 70% of small businesses see payroll taxes as a chronic headache. There are multiple taxes your business must withhold and remit to the IRS and other third parties.
Here are some examples.
Federal income tax
The employee’s annual earnings and filing status (married or single) determine the amount of tax your business subtracts from their income.
Medicare tax and Social Security tax
Both employees and employers are responsible for paying 7.65 percent of FICA (Federal Insurance Contribution Act) taxes.
State Income taxes
The amount that your company pays depends on each state. Some states do not withhold tax.
Federal Unemployment Tax Act ( FUTA) and State Unemployment Tax Act (SATU)
As an employer, the law requires you to pay FUTA. Combined with other federal and state taxes, these collections cushion workers from job losses.
Employee Wages
The largest portion of your payroll liabilities comes from workers' compensation. Employees may receive their wages hourly, weekly, or monthly, depending on their contracts.
You can calculate workers’ wages according to whether they receive salaries or hourly payments.
- For salaried employees, divide their yearly income by the number of periods in a year. Add any incentives or bonuses.
- A person's hourly wage equals their total hours multiplied by the agreed-upon rate. Extra payments could include incentives, bonuses, and overtime.
But note that you do not withhold taxes on wages for freelancers or independent contractors. That’s because they are responsible for filing their own taxes.
Did you know that misclassifying employees as independent contractors has landed some companies in trouble? According to the National Employment Law Project, these businesses end up paying huge fines to the IRS for breaking tax laws.
Your company can incur significant costs if you disregard tax regulations.
Paid Time Off (PTO)
Workers can take time off because of illness, vacation, or personal circumstances. You may have a payroll liability if your company allows your employees to take time off while still paying them. PTO is a liability since you’ll have to pay your staff on leave.
Because federal law doesn’t have specific rules regarding PTO, you can design your own policies and payment plans. For example, you could calculate PTO based on the employee’s duration of employment.
Alternatively, you can use the average number of hours a staff member works per pay period.
Voluntary Deductions
Employees may authorize payroll deductions for retirement plans, health insurance premiums, union dues, and other benefits. As a result, you should withhold these amounts and forward them to the relevant third parties. As long as they are on your payroll, they are liabilities.
Payroll Service Costs
Is your company using software or a professional employer organization (PEO) to manage payroll? Your business may have to pay for the following payroll services.
Outsourced payroll services can charge you on a check basis and a base account fee. In this case, you pay fees for each payroll.
You may also get a "per employee per month” payment plan (PEPM). It means you can pay a fixed charge plus a monthly base fee for the number of workers you compensate each month. PEPM is perfect if you offer commissions and bonuses.
Also, payroll companies for remote employees could charge you a fixed monthly fee for a specific number of workers if you run a DIY application.
Payroll Liabilities vs. Payroll Expenses
Payroll liabilities
These are amounts owed that your company has not paid. They have precise dollar amounts, dates, and third parties to whom you will transfer the money. Also, your liability accounts will reflect these dues as deductions from your workers’ paychecks.
Payroll expenses
The sum of your employee's gross pay and payroll taxes equals your payroll expense.
3 Benefits of Tracking Payroll Liabilities for Remote Businesses
It Helps You Manage Your Business Efficiently.
Payroll liabilities are an integral part of your business costs. It's also essential to track payroll arrears and understand how they impact your finances and profit. With these insights, you can manage your company efficiently.
It Reduces Employee Turnover.
Understanding and knowing the types of payroll liabilities can help you reduce employee turnover. As you learn about voluntary and involuntary deductions and their deadlines, you will know when to make them.
For example, you can keep your employees’ payments up to date by remitting their voluntary deductions on time. Also, you can ensure policies like insurance plans don’t lapse due to missed premiums.
Thus, you can increase job satisfaction and retention for your workers while taking care of their welfare.
It Helps You Align Your Business with Federal Regulation.
Federal law requires that you comply with all regulations concerning payroll liabilities. Knowing your payroll obligations and monitoring them will help you stay within the law.
How to Track Payroll Liabilities
Step #1: Compile All Payroll Related Documents
As a first step, ensure you document your payroll liabilities. Your information must have dates to show when you incurred the amounts and when you must clear them.
Step 2: Set Payment Due Reminders
To avoid missing the payment deadlines, create reminders of the due dates. For example, you can use an electronic calendar like Google Calendar, Outlook, etc.
Alternatively, you can rely on your vendor’s notifications.
Step #3: Get Payroll Software (Optional)
It’s also possible to automate payroll management using some software. For your payroll system to be efficient, consider the following factors:
- It must be reliable and easy to set up.
- The application must handle and automate all forms of employee payments around the globe. It includes salaried, hourly, full-time, and gig workers.
- It should make it easy for employees to manage federal regulations, checklists, and payroll processes.
- Payroll software must also enable users to abide by tax laws.
Take a Step Further
Hiring remote employees is now easier than before. NoHQ is an educational platform for remote companies. You can think of it as a wiki of tools for remote work and an ever-evolving resource that helps companies get excellent at enabling remote working.
Understanding payroll liabilities and how to track them is critical for your business. It enhances efficiency and ensures you are compliant.
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