What are payroll liabilities? Everything employers need to know

You probably don’t think much about payroll liabilities when you’re cutting checks. But imagine finishing a pay period, sending out paychecks, and realizing you forgot to set aside money for payroll taxes. Now, you’re looking for the funds to cover what you owe, and potentially facing penalties you could’ve avoided. Managing payroll liabilities goes beyond accounting paperwork. It’s part of keeping your business compliant and protecting against missed employer liabilities and costly penalties.

In this article, we’ll break down what payroll liabilities are, how they work, common mistakes to watch for, and best practices for tracking and paying them on time. Whether you handle payroll in-house or use a payroll service, knowing how to manage these obligations is key to following labor laws and tax regulations.

What are payroll liabilities?

Payroll liabilities are amounts an employer owes due to paying employee wages, but hasn’t yet paid. Every time you run payroll, you set aside money for things like earned wages, payroll taxes, and benefit contributions. These liabilities build up each pay period and stay on your books until you make the payments. 

Most payroll liabilities are considered current liabilities because they’re usually paid within a few days or weeks. But if a payment is delayed or scheduled for a future date more than a year out, as with a deferred compensation plan, it may show up as a long-term liability on the balance sheet.

How do payroll liabilities work?

When you run payroll, you withhold taxes and set aside other amounts your business owes. Payment typically doesn’t happen immediately, however. Instead, the money owed sits on your books as a payroll liability until you send the money to the appropriate parties. 

Liabilities accumulate with each period as your employees earn wages and you withhold employment tax liabilities like Social Security, Medicare, and federal income tax payments. They stay active until you pay your employees, the IRS, state agencies, or benefit providers. Clearing them on time keeps your records accurate and helps you avoid penalties. 

Payroll liabilities vs payroll expenses: key differences

It’s easy to mix up payroll liabilities and payroll expenses, but they play completely different roles in your accounting. One tracks what you still owe, while the other records what you’ve already paid. If you’re handling payroll management in-house or outsourcing payroll to a provider, you’ll need to know the difference between them to identify errors. 

• Payroll expenses are costs you’ve already incurred, like gross wages, insurance premiums, and reimbursed expenses..
• Payroll liabilities are amounts linked to wages that you owe but haven’t paid yet, like withheld taxes and employee deductions.
• Payroll expenses show up on your balance statement, while payroll liabilities appear on your balance sheet.
• Paying a payroll liability clears it from your books. Paying a payroll expense leads to a recorded business cost. 

5 types of payroll liabilities employers must know

Running payroll doesn’t just ensure your employees get paid; it creates new payroll liabilities that you’re responsible for managing. From withheld taxes to benefit contributions to accrued PTO, each pay period adds to the list of what you owe to others. Keeping up with these obligations is key to maintaining payroll compliance and avoiding penalties. 

1. Employee wages and salaries

If employees have earned wages, but you haven’t paid them yet, the unpaid amounts are considered a payroll liability. They stay on your balance sheet as a short-term debt until you issue the paycheck for the work already completed. 

2. Payroll taxes (employer and employee contributions)

Every time you run payroll, you’re responsible for withholding federal income tax, Social Security tax, and Medicare tax from employee paychecks. As an employer, you also owe your own share of Social Security and Medicare taxes. These amounts all count as payroll liabilities until you remit them to the IRS and state revenue agencies. 

3. Employee benefits contributions

When you withhold money from an employee’s paycheck for benefits like health insurance or a retirement plan, that money becomes a liability until you transfer it to the benefit provider. You’re legally required to keep those funds separate from other business money and pay them on time. 

4. Paid time off (PTO) and accrued leave

In many states, when company policy allows employees to cash out unused PTO, that accrued time becomes a payroll liability. It shows up on your books as an amount you owe the employee if they decide to leave the company, or until they take their earned time off. 

5. Wage garnishments and deductions

If an employee’s wages are garnished for things like back child support or unpaid debts, you’re responsible for withholding the correct amount and sending it to the right agency or creditor. Up to that point, the withheld amount is treated as a payroll liability. 

How to calculate and track payroll liabilities

If you’re managing payroll, you don’t want to feel like you’re guessing at what you owe. Between wages, deductions, and different payroll taxes, keeping accurate records is the only way to stay compliant. Below, we outline the steps you can take to calculate what you owe and keep track of it over time.

Step 1. Use payroll software to automate calculations

Manual calculations leave a lot of room for error, especially when you’re dealing with complex rules like Social Security wage limits or additional Medicare tax thresholds. Good payroll software can handle the math for you, automatically calculating wages, payroll taxes, and deductions each pay period.

Step 2. Understand payroll tax deadlines and requirements

Different payroll taxes have different schedules. Some employers need to deposit taxes after every pay period, while others only need to do so monthly. Calendar reminders and other tools can help you stay on top of your deposit schedule for federal income tax, Social Security tax, Medicare tax, and federal unemployment tax. The EFTPS helps you make electronic federal tax payments on time. 

Step 3. Set up a payroll liability account in your ledger

A separate payroll liability account helps you track what you owe versus what you’ve paid. When you run payroll, just record the amounts withheld and the employer taxes due. Once you send a tax payment, you’ll update the account to reflect the withdrawal and reduce the liability. 

Step 4. Reconcile payroll liabilities regularly

Mistakes can slip through if you’re not checking your numbers. Compare your payroll records against your general ledger and bank statements, monthly. Reconciling early makes it easier to spot missing tax payments, incorrect deductions, or overpayments. 

Step 5. Monitor changes in tax laws and regulations

Federal, state, or even local rules around employment tax can shift. Subscribe to IRS updates or check in with your payroll provider regularly so you’re not caught off guard by adjustments to tax rates, income tax withholding tables, or state unemployment rules.

5 payroll liability best practices

Managing payroll liabilities goes beyond getting payments out the door. It’s about staying organized, keeping good records, and making sure you’re following the rules. The best practices below can help you stay on track.

1. Automate payroll processes

Payroll automation software can take a lot of the guesswork out of payroll. Using a trusted payroll service or payroll software can help you calculate payroll taxes, schedule federal tax payments, and send reminders for upcoming deadlines. It also helps you avoid manual errors that might create bigger problems down the road. 

2. Keep accurate payroll records

Accurate records are your best defense if there’s ever a question about your tax liability. Keep detailed files for each pay period, including wages, deductions, employee compensation, and tax payments. Most states and the IRS also require that you retain copies of these documents for several years. 

3. Set aside payroll taxes in advance

It’s easy to think of withheld taxes as extra cash, but it shouldn’t play a role in your financial planning. As soon as you run payroll, move any withheld amounts—like federal income tax, Social Security tax, and Medicare tax—into a dedicated payroll account separate from your business bank account. That way, you’re ready when it’s time to pay.

4. Stay updated on payroll regulations

Payroll tax regulations can and do change. Congress periodically adjusts additional Medicare tax thresholds, and many state laws require review and adjustment of unemployment tax rates to keep pace with inflation. Make it a habit to check for updates from regulators, particularly if your workforce covers multiple states. 

5. Conduct regular payroll audits

A quick self-audit can catch small mistakes before they become major liability issues. Review your payroll process quarterly to ensure you’re withholding the right amounts, making timely deposits, and keeping accurate records. If you spot a problem early on, it’s typically easier (and cheaper) to fix. 

Common payroll liability mistakes (and how to avoid them)

Between tax deadlines, employee classifications, and shifting state regulations, managing payroll comes with a few potential pitfalls. Below are some of the most common mistakes businesses make when managing payroll and suggestions on how to avoid them.

Misclassifying employees (W-2 vs. 1099 contractors)

Labelling a worker as an independent contractor when they really qualify as an employee can lead to skipping important payroll taxes you’re supposed to withhold and pay. To avoid confusion, review the IRS guidelines on worker classification and regularly review every worker’s status to ensure you’re in the clear when you run payroll.

Missing payroll tax deadlines

Late tax payments can trigger fines and interest charges. Setting calendar reminders for your Social Security tax, Medicare tax, and unemployment tax deadlines can help your team stay on top of what needs to be paid when. Investing in payroll software might bring even more peace of mind, as many tools allow you to automate the entire payment process.

Failing to withhold or remit taxes properly

Not taking out the correct amounts for income tax withholding, Social Security, or Medicare taxes can leave you with a hefty bill later. Make sure your payroll process accounts for all the required deductions, and verify that each payment you send matches what you’ve withheld. 

Not keeping up with state and local payroll laws

State and local rules around payroll taxes and state unemployment change regularly. Failing to keep up can mean missed payments or incorrectly applied tax rates. Check with your state’s labor department for updates, and be sure to ask about multi-state compliance if you work with a payroll provider. 

Manage payroll liabilities in a single place with Rippling

If you want payroll so powerful it runs itself, you want Rippling. Rippling offers full-service payroll software with everything we’ve discussed in this article so far, plus even more—it’s built on top of a single source of truth for employee data. That means your employee data isn’t tied to one specific app—it’s the same across payroll, time and attendance, onboarding, performance management, and any other apps you use within our unified workforce management platform. 

What does that mean for you and your team? For starters, you have a single source of truth for up-to-the-minute employee information. It also means that your team doesn’t have to reenter information across systems when an employee gets promoted or moves to a different city to work remotely. From changing security permissions to updating PTO policies, Rippling triggers automatic updates to employee information in a single flow. This is especially beneficial for small businesses. It allows you to do more with less—less money, less headcount, and less time. 

Payroll liabilities FAQs

How do you record payroll liabilities?

You record payroll liabilities on the balance sheet by listing them as short-term debts. Every time you run payroll, you’ll track the payroll taxes, Social Security, and Medicare tax that you owe, along with any deductions, as short-term debts. Once you send the payments to the IRS, state agencies, or benefits providers, you can move them out of liabilities and record them as completed payments in your payroll account. Good payroll software typically takes care of that automatically.  

What are the 941 payroll liabilities?

Form 941 covers the payroll liabilities most employers need to report to the IRS: federal income tax, social security tax, Medicare tax, and the additional Medicare tax for higher earners. It includes both what you’ve withheld from employee paychecks and what you owe as the employer. You usually have to remit these payments monthly or semi-weekly through the EFTSPS, depending on your deposit schedule. 

Are payroll liabilities considered expenses?

No, payroll liabilities aren’t considered expenses. They represent the amounts your business still owes to employees, government agencies like the IRS, or benefit providers, but haven’t paid yet. For example, payroll taxes, Medicare tax, and other deductions get withheld from paychecks. Until the funds make it to the payee’s bank account, however, they’re considered unpaid and stay on your balance sheet as liabilities. 

Is salaries expense a liability?

No, salaries expense is not a liability. It’s an operating expense that shows the cost of paying employees for their work during a specific period. Once wages are earned, the cost is recorded as an expense on your income statement. If you haven’t paid those wages yet, the unpaid amount shows up separately on your balance sheet as a liability, typically under an account called ‘wages payable.’

Is wages payable a liability?

Yes, wages payable is a liability. This number represents money you owe employees for work they’ve already completed, but for which they haven’t been paid. Until you issue the paycheck, the amount you owe stays on your balance sheet as a short-term liability.

This blog is based on information available to Rippling as of May 28, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.