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+1-802-778-9005Payroll liabilities are yet to be paid, and payroll expenses are the costs incurred for the payroll function in a business. The main difference between payroll liabilities and expenses is the timing and their recording when preparing the books of accounts.
When the amount is owed and yet to be paid, then it is called liabilities and is shown under the current liabilities head in the balance sheet. When the amount is already paid, then it is called an expense and is shown under the head expenses in the Income statement.
Payroll liabilities are unpaid, while payroll expenses are paid at the time of recording in the books of accounts.
Payroll liabilities are any outstanding payments owed by an employer to employees, government agencies, insurance carriers and other entities as a result of processing payroll.
Payroll expenses represent the costs associated with paying employees for their work, reflecting the gross pay and any relevant withholdings and payroll taxes.
In simple words, until the costs related to running payroll are paid, they’re liabilities. Once these costs have been paid, they’re considered expenses.
Payroll liabilities are payroll-related payments you must pay for your business which includes wages your employees have earned but you have not paid for yet, employee taxes and payroll service costs. Payroll liabilities are present in every payroll you run. However, most companies pay their payroll responsibilities quickly to avoid any legal penalties.
Some examples of payroll liabilities include:
Payroll expenses are the costs associated with hiring and paying employees, such as wages, benefits, bonuses, and payroll taxes for your business. These are the expenses paid to employees in exchange for services rendered by them to a business, including regular wages, overtime, bonuses, and commissions.
Payroll expense is the cash paid during an accounting period for salaries and wages in a cash basis company. However, in an accrual basis company, payroll expense is the amount of salaries and wages earned by employees during the period, whether or not these amounts were paid during that period.
Some examples of payroll expenses are:
The terms “Payroll liability” and “Payroll expense” both deal with money, and both need to be paid by the employer. The money in a liability account shows the amount deducted from employee paychecks or the amount you still owe. Payroll liabilities have specific dollar amounts, dates, and agencies to which you must send the money. Payroll expense refers to the total payroll amount for the specified pay period. Payroll liabilities are the amount that employers pay for hiring workers. Payroll expenses are the costs incurred as a result of paying your employees for their day-to-day tasks.
| Components of Payroll | Payroll Liabilities | Payroll Expenses |
| Timing | Payroll liabilities include unpaid wages to employees, employee tax withholdings (e.g., income taxes), and employer tax obligations that are due and will be paid later.. | Payroll expenses are the expenses paid when employees earn wages and benefits during their working period. |
| Reporting | Payroll liabilities are recorded on the Balance Sheet until they are remitted to the government or paid to the employees. | Payroll expenses are recorded on the Income Statement as expenses like salaries, wages, payroll taxes, and employee benefits. |
| Nature | Payroll liabilities are obligations or debts that the company needs to pay related to payroll. In short, these costs are futuristic in nature and haven’t been paid yet. | Payroll expenses are the expenses related to gross wages, salaries, employer-paid taxes, and benefits (like health insurance or retirement contributions) that have been paid in the past. |
| Account Type | Payroll Liabilities are permanent accounts that are not closed at the end of the fiscal year. | Payroll Expenses are temporary accounts that will be closed at the end of every financial year. |
Every business must record payroll liabilities and payroll expenses using the accrual method of accounting, which matches revenue earned with expenses incurred. The accrual method records payroll expenses in the month they are incurred, regardless of when the expenses are paid in cash.
Some of the payroll liabilities are employee compensation, taxes, payroll service costs, and voluntary deductions, which all generate payroll liabilities. This may include taxes withheld from employees, such as federal and state income tax, social security, and Medicare. Here’s a list of some most common payroll liabilities:
When you run payroll, you are taking the necessary steps to pay your employees, and the wages you pay are a type of liability you owe. Employees receive payment for the work they did in a specific pay period, typically paid on a weekly, biweekly, semimonthly, or monthly payroll schedule. Any work employees perform but haven’t yet been compensated for is considered a liability, such as gross wages owed to employees and independent contractors. There are several ways to calculate liability for a specific pay period:
No taxes are withheld on compensation paid to independent contractors. However, you’re required to withhold taxes on employee pay based on information the worker provides on Form W-4.
Payroll tax withholdings are another integral payroll obligation. All employers must file payroll taxes and contribute these taxes for every worker they hire. Most employers must withhold money from employees’ paychecks to remit it to the appropriate tax collection agency. Taxes are withheld from pay to fund income taxes, social security, healthcare taxes, benefits contributions (e.g., pensions), etc. Employers incur expenses for some of these taxes, including:
All employees must complete IRS Form W-4. When your employee fills out a W-4, it helps you to calculate their withholding allowances. The worker’s gross wages are also a factor in tax contributions. Generally, payroll taxes are paid quarterly. As payroll taxes aren’t immediately sent to the IRS or state or local agencies, they are considered liabilities until deposited.
Voluntary deductions represent specific items above the statutory minimum that the employee wants to pay out of their paycheck. Health insurance premiums, retirement plan contributions, dental insurance, and other benefit programs are funded through payroll withholding. The employer’s share of the costs is a payroll expense.
If a worker repays a loan from the employer, the loan payments withheld from pay are not a payroll liability or a payroll expense. Instead, the payment increases the employer’s cash account and reduces a loan-receivable (asset) account.
Every business that invests in payroll software or a professional employer organization (PEO) has liabilities in payroll service costs. When working with payroll software, you may pay your service costs at the end of every month or the beginning of the following month, similar to credit card or utility bills.
PEO costs may have monthly or yearly contract fees. Payroll companies have various pricing structures. It’s essential to compare payroll software costs before you sign up because one pricing structure may be less expensive than another. Below are the six payroll software pricing structures:
You may have to create an account for several other payroll liabilities, depending on the employee benefits you offer and your employees’ current financial liabilities, which include the following:
All contributions and withholdings are payroll liabilities until you transfer money to the correct agencies.
You May also read: How to Fix QuickBooks Payroll Liabilities Not Showing
Payroll expense may be the largest expense that a company incurs, especially when it is in a services industry where revenues are directly related to your working hours. These are the expenses you pay as a business owner for your employees.
There are two kinds to consider;
Payroll expenses consist of several components, such as gross salaries and wages, tax withholdings, benefits withholdings, costs related to payroll services, and much more.
Employers must pay employees and contractors for the services they perform. Salaries and wages are usually the largest payroll expenses you pay for employers. This is the primary component of payroll expense which represents an employee’s basic salary without including additional incentives and before making any deductions. This amount is taxable.
Withholding taxes refer to the amount of money you withhold from your employee’s paycheck to pay for their taxes. When your employee submits a W-4 form, you will be able to calculate the exact amount of taxes you need to withhold. The taxes to be withheld may include the following:
Unemployment tax withholdings can provide workers with crucial income as they search for new job opportunities. The Federal Unemployment Tax Act and State Unemployment Tax Act offer temporary financial assistance for those who lose employment.
The current employer’s FUTA tax rate is 6% on the first $7,000 in gross income a worker earns. However, if the state unemployment tax applies to wages, the employer can use a 5.4% FUTA credit, which reduces the FUTA tax to 0.6%. Total federal and state unemployment taxes vary and depend on the unemployment program in each state.
As an employer, you likely understand the importance of offering employee benefits. It’s a strategic approach that can lead to a happier workforce, higher employee retention, and overall success for your business. However, administering these benefits can be complicated, especially regarding withholdings.
Benefits withholding refers to deducting an employee’s share of the benefit plan from their gross compensation. Depending on your company, you may cover a portion or all of the benefits costs from a worker’s pay. Some examples of employee benefits include:
For example, you may withhold amounts for the employee’s share of insurance premiums or their retirement contributions. Your share of the costs is a payroll expense. Generally, the only payroll cost for an independent contractor or freelancer is the dollar amount you pay for services.
The major difference between hiring contractors and employees is to do with tax withholdings. Contractors are responsible for their own tax withholdings. They will submit their own FICA and benefits plans. When we pay contractors their gross compensation, they handle the complexities of tax withholdings, making it a seamless transaction.
Employers must also include payments to freelancers and independent contractors in their payroll expenses. However, it’s important to note that you don’t have to withhold any of an independent contractor’s gross income.
A worker’s classification determines how your business handles tax withholdings for them. If the worker is an employee, you’re responsible for the payroll expenses. Independent contractors, on the other hand, are responsible for all tax withholdings and don’t receive benefits from the business, so your only payroll expense is the gross amount you pay for services.
Payroll liabilities are the amounts a company owes but has not yet paid to the employees. These include things like employee tax withholdings, social security, Medicare, and other deductions such as health insurance premiums or retirement contributions. They are recorded as liabilities on the balance sheet until they are paid. Employers need to know how much they need to pay for these when hiring employees in order to maintain profitability over time.
Payroll Expenses are costs the company incurs for employee compensation. These include wages, salaries, benefits, and employer-paid taxes. Payroll expenses are recorded on the income statement and directly affect the company’s profitability. So, it’s important to closely review your payroll expenses and ensure you’re accurately tracking deductions and taxes.
Set up your preferences to track payroll expenses:
Note: When running payroll, review your employees’ paycheck details. If you selected the Assign one class per Earnings item option, make sure to assign a class to each earning item individually.
To categorize payroll wages in QuickBooks Online, you’ll need to create pay categories. Here’s a step-by-step guide to help you:
Save the Pay Category
Once all fields are completed, select Save.
Note: In employee pay rates, earnings can be configured up to 5 decimal points.
