Payroll liabilities for small businesses
13 min read
What are payroll liabilities?
Payroll liabilities are amounts you’ve withheld from your employees’ paychecks, or taxes your business owes, that you haven’t yet paid to the government or a third party. They’re obligations and they sit on your books until you remit them.
One thing that often confuses people is that payroll liabilities are generally not the same as payroll expenses.
Employee withholdings (the portion owed by the employee) are only a liability and don’t affect your net income because they’re already part of the gross wages you previously expensed. The employee is the one that owes and pays the tax (not you as the employer) so they’re not your expense – you’re just responsible for withholding and transmitting them.
Other items, such as the employer portion of FICA, FUTA, and SUTA are both a payroll tax expense (you owe them as the employer and they reduce your net income when incurred) and a liability until remitted.
The main distinction is that a payroll liability is an amount you’ve either set aside or collected on behalf of another (“in trust”) but have yet to pay over to the appropriate party.
How payroll liabilities work
Think of it this way: when you run payroll, you don’t just hand your employees their full gross pay. You hold back portions of their wages for taxes and other deductions, and you also owe certain taxes out of your own pocket. Until those amounts are sent to the IRS, your state, or another recipient, they’re considered liabilities.
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Types of payroll liabilities
Payroll liabilities fall into three main categories, employee withholdings, business taxes owed and third-party payments. Let’s start with a quick overview and then below we’ll dive deeper into each category.
- Money withheld from employees – Amounts you deduct from your employees’ gross pay and hold until you remit them.
- Taxes owed by the business – Taxes your company is legally required to pay out of its own funds.
- Mandatory or voluntary third-party payments – Non-tax obligations like benefits premiums, paid time off accruals, or payroll processing fees.
Knowing which category each belongs to matters, because it affects how you track it, when payroll tax liability is due, and what happens if you miss a payment.
Learn more about the taxes included in employer tax liability and more in our guide to payroll taxes.
What are examples of employee payroll withholdings?
Common examples of payroll withholding are federal income tax, Social Security and Medicare (FICA) taxes, state and local income taxes, wage garnishments, and pre-tax benefit deductions like health insurance or 401(k) contributions.
Essentially, this is money you deduct directly from your employees’ gross pay. Generally, you hold these deductions as a liability until they’re paid to the appropriate authority. We’ll go into these examples below.
It’s worth noting that you don’t keep this money; you hold it “in trust” until it is remitted to the government or a third party. And, if these withheld amounts aren’t deposited on time, the IRS can assess the Trust Fund Recovery Penalty (TFRP), which can hold responsible individuals personally liable for any unpaid payroll tax liability amount.
Federal income tax withholding
Federal income tax withholding is the amount you take out of each employee’s paycheck based on the information they provide on their IRS Form W-4. You use their completed form to calculate how much federal income tax to deduct each pay period.
Employee share of Social Security and Medicare taxes (FICA)
FICA taxes fund Social Security and Medicare. The employee portion is 6.2% for Social Security (known as OASDI, or Old-Age, Survivors and Disability Insurance) and 1.45% for Medicare, for a combined 7.65% withheld from each employee’s wages.
State and local payroll taxes (SUI & SDI)
Depending on where your business operates, you may also need to withhold state and local payroll taxes. These can include state income tax withholding, state disability insurance (SDI), and in some cases, local or municipal income taxes. Each state sets its own rules, rates, and filing requirements, so it’s important to check with your state’s revenue agency.
Wage garnishments
A wage garnishment is a legal order requiring you to withhold a portion of an employee’s earnings to pay off a debt, such as child support, a tax levy, or a court judgment. When you receive a garnishment order, you’re responsible for deducting the specified amount from the employee’s paycheck and sending it to the appropriate agency or creditor.
Other payroll deductions
There are a number of other deductions that you may make. If the deduction is paid to an external entity, it creates a payroll liability. Common examples include health insurance premiums, 401(k) contributions, and flexible spending account (FSA) contributions.
What is an employer-paid tax liability?
Unlike withholdings, employer-paid tax liabilities are taxes that your business is legally required to pay out of its own pocket based on your total payroll. These taxes can be considered an additional cost of having employees.
Employer share of FICA taxes
Just as employees pay 7.65% of their wages toward FICA, employers match that amount. You pay:
- 6.2% for Social Security, up to the annual Social Security wage base and
- 1.45% for Medicare on each employee’s wages. Employers must withhold an additional 0.9% Medicare tax after an employee’s calendar-year wages exceed $200,000, with no employer match
This employer share is a payroll tax liability that you owe directly, and it’s one of the biggest employer-paid payroll costs to plan for.
You file Form 941 quarterly with employer tax liability reported alongside wages paid and other payroll tax details. Review IRS Form 941.
Federal unemployment tax (FUTA)
The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal tax that funds unemployment benefits. Only you, as the employer, pays FUTA; nothing is withheld from employees.
You report FUTA tax annually on IRS Form 940. The tax applies to the first $7,000 of wages paid to each employee during the year, though many employers receive a credit that reduces the effective rate when they also pay state unemployment taxes on time.
Review IRS Form 940.
State unemployment tax (SUTA/SUI)
Most states also require employers to pay state unemployment tax, often called SUTA or SUI. Like FUTA, this is an employer-paid liability, not withheld from employees. Rates and wage bases vary by state and are often influenced by your business’s experience rating, meaning your rate can change over time based on former employees’ unemployment claims.
Check with your state’s workforce or revenue agency for your specific requirements.
Tracking non-tax payroll liabilities: PTO, benefits, and overhead
Not every payroll liability is a tax. Some are obligations to third parties or accruals you build up over time. These non-tax payroll liabilities are just as important to track, because they represent money you owe or will owe, even if the payment isn’t going to the IRS.
Paid time off (PTO) and vacation accruals
If your business offers paid time off or vacation days, your employees earn those benefits as they work. As they accrue PTO, you build up a liability on your books representing the value of that earned time.
If an employee leaves, you may be legally required to pay out accrued vacation, depending on your state. Tracking this accrual as a payroll liability helps you understand your true labor costs and avoid surprises.
Workers’ compensation insurance premiums
Workers’ compensation insurance is required in most states for businesses with employees. Depending on how your policy is set up, you may owe premiums based on your actual payroll.
If your insurer bills you based on estimated payroll and then reconciles at the end of the year, any unpaid or accrued premium amounts are payroll liabilities until they’re settled.
Payroll liability vs. payroll expense: What’s the difference?
It’s easy to mix up payroll liabilities and payroll expenses, but the distinction matters for accurate bookkeeping. We’ve outlined a comparison and example to illustrate the difference between a payroll liability vs expense.
| Payroll Item | Payroll Liability vs. Expense Classification |
| Employee federal income tax withholdings | Liability only |
| Employees’ share of FICA taxes | Liability only |
| Employer portion of FICA taxes | Expense and liability |
| FUTA taxes | Expense and liability |
| SUTA taxes | Expense and liability |
Cooper’s Coffeehouse LLC had payroll withholdings from its employees of $30,000 last quarter. That $30,000 is composed of federal income tax withholdings and its employees’ share of FICA.
- The total is not a payroll tax expense because the business does not actually owe the tax, its employees do.
- It is a payroll liability because the business is holding it on behalf of the employees and it has yet to be deposited with the IRS.
Here’s the tricky part: Certain items represent both a payroll tax expense and a payroll liability.
- The amounts it owes for the employer portion of FICA, FUTA and SUTA are all expenses that reduce its net income because the business owes the tax and pays it with its own cash.
- The amounts are also liabilities because it sets the money aside until it is time to deposit it with the appropriate authority.
How to calculate your payroll liability
Calculating your payroll liability means adding up everything you’ve withheld from employees plus everything your business owes. Here’s a step-by-step process:
- Determine gross wages. Add up all wages paid to each employee for the pay period.
- Calculate federal income tax withholding. Use each employee’s W-4 and IRS withholding tables to find the amount to withhold.
- Calculate employee FICA. Multiply gross wages (up to the Social Security wage base) by 6.2% for Social Security and 1.45% for Medicare.
- Calculate employer FICA. Match the employee FICA amount from your own funds.
- Calculate FUTA. Apply the FUTA rate to the first $7,000 of each employee’s wages.
- Calculate SUTA/SUI. Apply your state unemployment rate to the appropriate wage base.
- Add state and local withholdings. Include state income tax, SDI, and any local taxes.
- Add garnishments and benefit deductions. Include any wage garnishments and pre-tax benefit deductions you’re holding.
- Total everything. The sum of all these amounts is your total payroll liability for the period.
When are payroll liabilities due?
Payroll tax deposit due dates depend on your IRS deposit schedule, which is based on the total employment taxes you reported during your lookback period—not how often you pay employees.
- Monthly deposit schedule — If you reported $50,000 or less in employment taxes during the lookback period, you’ll generally follow a monthly deposit schedule. Deposits are generally due by the 15th of the following month.
- Semiweekly deposit schedule — If you reported more than $50,000 in employment taxes during the lookback period, you’ll generally follow a semiweekly deposit schedule. Deposits for wages paid Wednesday through Friday are due the following Wednesday; deposits for wages paid Saturday through Tuesday are due the following Friday.
- Next-day deposit rule — No matter which schedule you’re on, if you accumulate $100,000 or more in employment taxes on any single day, you must deposit that amount by the next business day.
- Small-employer exception — If you have an accumulated liability for the current year, you can send your payment quarterly if you file your Form 941 on time and when your current or preceding quarter’s liability is less than $2,500, and you did not trigger the $100,000 next-day rule.
- FUTA—If you have a liability that exceeds $500 you must deposit it by the last day of the month following that quarter. If your liability does not exceed $500 you can carry it forward to the next quarter.
Knowing your deposit dates and keeping on top of them can help you avoid any penalties. If you need help keeping on top of payroll, consider enlisting the help of a small business tax pro.
Note that dates for other amounts such as state liabilities may be different so check with the authority you are required to pay for more information. The schedule above covers your federal income tax, FICA and FUTA deposits only. Each state sets its own deposit frequency and thresholds for state income tax withholding, so you can be on a different schedule for state taxes than you are federally. State unemployment (SUI/SUTA) contributions and wage reports are generally due quarterly, and local taxes may run on yet another calendar—often with a different agency for each.
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Common payroll liability mistakes
Even careful business owners can stumble when it comes to payroll liabilities. Here are some of the most common mistakes, and how to avoid them.
Late tax deposits
Missing a deposit deadline is one of the costliest payroll mistakes you can make. The IRS charges failure-to-deposit penalties that increase the longer you’re late, and unpaid trust fund taxes can trigger the Trust Fund Recovery Penalty, which holds responsible individuals personally liable. Additionally, states may impose separate penalties for failure to deposit required amounts.
This is why it’s important to keep on top of your deposit schedule or let a payroll service handle the timing for you.
Miscalculating withholdings
Getting withholding amounts wrong, whether for federal income tax, FICA, or state taxes, creates a ripple effect. You may underpay the government and owe penalties or you could over-withhold and owe your employees refunds.
Using payroll software or a professional service helps ensure the math is right every time.
Improper worker classification
Treating an employee as an independent contractor when they should be classified as an employee can lead to back taxes, penalties, and interest. The IRS looks at the degree of control you have over the worker to determine their status. If you’re unsure how to classify a worker, review our guide on employee vs. independent contractor classification, or get help making the right call.
Inaccurate payroll records
Disorganized records make it hard to verify that you’ve withheld and deposited the right amounts. If the IRS or your state ever questions your payroll, you’ll need clear, well documented records to back up what you reported. Keeping accurate, up-to-date payroll records protects you in an audit and makes year-end filing far less painful.
Block Advisors can help you manage payroll liabilities and more
Navigating payroll liabilities can feel like a lot, but you don’t have to figure it out alone. Understanding what you owe, when it’s due, and how to track it helps you keep your books clean, stay compliant with tax obligations, and avoid costly penalties.
Let our experts lighten your load, in person or virtually, year-round. Our bookkeeping, payroll preparation, and tax services are designed with small business owners like you in mind, so you can stop worrying about the number crunching and get back to the work you love.
FAQs: Payroll liabilities
What are examples of payroll liabilities?
Examples of payroll liabilities include federal income tax withheld from employee pay, employee FICA taxes, state and local payroll taxes, wage garnishments, benefits deductions, employer FICA taxes, FUTA, SUTA, accrued PTO, workers’ compensation premiums, and unpaid payroll processing fees.
How do you record payroll liabilities?
You record payroll liabilities when you run payroll and withhold or owe amounts that have not been paid yet. These amounts are typically recorded as liabilities on your balance sheet until you deposit taxes or remit payments to the appropriate agency, provider, or third party.
What happens if payroll liabilities aren’t paid on time?
If payroll liabilities are not paid on time, your business may face penalties, interest, and compliance issues. Unpaid trust fund taxes, such as federal income tax withholding and employee FICA, can also trigger the Trust Fund Recovery Penalty, which may make responsible individuals personally liable.
Should payroll liabilities show a zero balance?
Payroll liabilities do not always show a zero balance. They may appear on your balance sheet between the time payroll is run and the time taxes, benefits, garnishments, or other amounts are paid. After you make the required payments, the related liability balance should generally clear.
What’s the difference between accrued payroll and payroll liabilities?
Who can help calculate my payroll tax liability?
A small business tax professional, bookkeeper, or payroll provider can help calculate your payroll tax liability. Block Advisors can help you understand what you owe, track deadlines, and manage payroll and tax responsibilities throughout the year.