Payroll Liabilities Explained: Taxes, Deductions, and Solutions

What are payroll liabilities?

Payroll liabilities are the amounts a business owes after it runs payroll, but hasn’t paid yet. These include employee wages, payroll taxes, and other deductions or contributions that haven’t been disbursed. Essentially, they’re the obligations your business must settle after each pay period to remain compliant and maintain employee trust.

These liabilities don’t just relate to employee paychecks. They also involve tax withholdings, employer contributions, and third-party payments like retirement plans or life insurance premiums. All of these are tracked under your payroll liability account in the books and should be carefully monitored.

Here’s a breakdown of who the business owes when it comes to payroll:

These liabilities typically sit in your liability and expense accounts until payment is made.

Types of payroll liabilities

Here's a look at the most common payroll liabilities employers must manage carefully.

Employee compensation

This is the core liability: the actual employee pay for the work done during a pay period. It includes:

• Wages and salaries: Hourly or fixed employee wages, recorded as wages payable until paid.

• Bonuses and commissions: Often performance-based and may have different tax treatment.

• Unpaid wages: Any earnings due but not yet paid.

• Paid time off (PTO): Holiday pay, sick leave, and other earned time off, often tracked as a payroll liability balance.

These amounts are generally listed under payroll expense accounts and later moved to the liability account until they're paid out.

Payroll taxes

These include both employee tax withholdings and the employer’s own contributions. Depending on your location, this may involve several types of taxes.

In the UK:

• Income tax (PAYE): Deducted at source through the Pay As You Earn scheme.

• National Insurance Contributions (NICs): Shared between employee and employer.

In the US:

• Federal income tax: Withheld from employee paychecks.

• Federal Insurance Contribution Act (FICA): Covers Social Security and Medicare; split between employee and employer.

• Federal Unemployment Tax Act (FUTA): Paid by employers only.

• State income tax and local income tax: Varies by location.

• State Unemployment Tax Act (SUTA): Employer-funded in most cases.

All these tax amounts are considered payroll liabilities until they are paid to the relevant agencies.

Voluntary deductions

These are amounts employees choose to have withheld. Even though they’re optional, employers are legally responsible for paying payroll liabilities to third parties on time.

Examples include:

• Retirement contributions (e.g., pensions or 401(k) plans)

• Health and life insurance premiums

• Union dues

• Charitable donations

Voluntary deductions are recorded in a payroll liability account and should be categorised separately from tax obligations or payroll service costs.

Wage garnishments

These are court-ordered deductions from an employee’s gross pay to cover personal debts. As the employer, you’re required by law to deduct and remit them accordingly.

Common types of wage garnishments include:

• Child support

• Student loans

• Tax debts

• Consumer debts (e.g., credit cards or loans)

Garnished amounts must be accurately recorded and paid to the appropriate agency, or the business may face legal action.

Calculating payroll liabilities

Accurate payroll calculations require solid data, clear categorisation, and precise recordkeeping to avoid errors and ensure compliance.

Gathering employee information

Before you can process payroll, you need reliable and updated employee data. This step affects every other part of your payroll process.

Here’s what to collect:

• Hours worked (for hourly staff)

• Salaries or hourly rates

• Overtime records

• Paid time off (PTO) balances

• Tax withholding forms (e.g., W-4 in the US, starter checklist in the UK)

• Voluntary deductions enrolments (pension, health insurance, etc.)

• Court orders for wage garnishments

You should also confirm employment status, location (for state income tax or local taxes), and any benefits linked to international payroll if applicable.

Determining gross wages

Gross pay is the total amount earned by an employee before any deductions. It’s the foundation for calculating payroll liabilities.

For hourly employees: Gross pay = Hours worked × Hourly rate (+ Overtime)

For salaried employees: Gross pay = Annual salary ÷ Number of pay periods

Make sure to include:

• Bonuses and commissions

• PTO pay

• Any retroactive pay adjustments

Applying deductions and taxes

Once you’ve calculated gross wages, it’s time to apply the relevant payroll taxes and deductions to reach net pay and identify your payroll liabilities.

Recording liabilities

Each of these deductions and contributions creates a payroll liability. Until they're paid, they must be recorded in your accounts correctly.

Here’s how to handle the bookkeeping:

• Use a separate payroll bank account to manage tax payments and disbursements.

• Record all obligations in a payroll liability account, separate from expense accounts.

• Categorise transactions clearly (e.g., NICs, FUTA, pensions).

• Reconcile liabilities with payroll records at the end of each pay period.

Be sure to compare current amounts with your previous tax liability to flag irregularities.

Payroll liabilities in the UK

Payroll in the UK comes with its own set of rules, forms, and deadlines. From tax withholdings to pensions, employers must manage several recurring liabilities with precision to remain compliant with HMRC.

National Insurance Contributions (NICs)

NICs are a shared responsibility between the employer and the employee. They fund state benefits like pensions, maternity leave, and jobseeker’s allowance.

• Employee NICs are deducted directly from employee pay.

• Employer NICs are an additional cost added on top of employee wages and are considered part of total employment costs.

2024/25 NIC thresholds (as a general guide):

These rates may vary yearly, so always check the latest figures from HMRC.

Income tax (PAYE)

The Pay As You Earn (PAYE) system requires employers to deduct income tax from salaries before issuing employee paychecks. Tax codes determine the correct deduction per employee.

Employer responsibilities include:

• Using HMRC’s tools or payroll software to calculate correct tax amounts

• Updating tax codes when notified

• Submitting tax payments monthly or quarterly

Pension contributions

Auto-enrolment means most UK employers must provide a workplace pension scheme. This creates a payroll liability each pay period until contributions are paid.

• Employee contributions: Deducted from gross pay

• Employer contributions: Additional cost that must be budgeted for

Minimum total contributions are currently 8%, with at least 3% coming from the employer. Contributions must be paid to the pension provider by the 22nd of the following month.

Reporting to HMRC

Employers must submit Real Time Information (RTI) every time they run payroll. This includes:

• Full Payment Submission (FPS): Sent on or before each payday

• Employer Payment Summary (EPS): For reclaiming statutory payments or reporting no payment periods

These reports ensure payroll liabilities are accounted for and help HMRC match tax deposits with reported wages.

Payroll liabilities in the US

Handling payroll in the US means juggling a mix of federal, state, and sometimes local requirements. Each type of liability must be calculated and recorded correctly to avoid fines.

Federal payroll taxes

The two core components under the Federal Insurance Contribution Act (FICA) are:

• Social Security (6.2% from both employee and employer)

• Medicare tax (1.45% from both sides, with an additional 0.9% for high earners on the employee side only)

Employers also withhold federal income tax based on IRS tax tables and W-4 forms. These taxes form a substantial part of payroll expenses and must be reported accurately.

State and local taxes

Depending on your business location, you may also need to deduct:

• State income tax: Required in most states except for a few (e.g., Florida, Texas)

• Local income tax: Applied by some cities and counties

Employers must check each jurisdiction’s rates and reporting schedules. This is especially critical for businesses with remote teams across multiple states.

Unemployment taxes

These are employer-only payroll liabilities, not deducted from employee wages.

• Federal Unemployment Tax Act (FUTA): Typically 6.0% on the first $7,000 of each employee’s wages (may be reduced by state credits)

• State Unemployment Tax Act (SUTA): Rates and thresholds vary by state

Both are key payroll related costs and must be budgeted as part of total business expenses.

Reporting to IRS

The IRS requires employers to file:

• Form 941 (quarterly): Reports federal tax, FICA taxes, and tax withholdings

• Form 940 (annually): Reports FUTA tax

• W-2 forms: Provided to employees annually with a copy to the Social Security Administration

• 1099 forms: If paying independent contractors

Most businesses use payroll software or payroll companies to manage reporting, but understanding the requirements helps avoid underreporting or late filings.

Managing payroll liabilities

Even the most accurate payroll calculations can lead to trouble if liabilities aren’t managed properly. The key lies in consistency, automation, and staying informed, because missed payments or outdated records can cost far more than just money.

Using payroll software

Modern payroll software like QuickBooks Payroll or other payroll service providers can drastically reduce manual errors and admin work.

Key benefits:

• Automated tax calculations: Handles complex payroll tax rules, including state income tax, FICA taxes, and voluntary deductions.

• Real-time tracking: Monitors payroll liability balances, helping you keep tabs on every pay period.

• Scheduled payments: Ensures timely tax deposits and disbursements to employees and third parties.

• Record keeping: Organises payroll records and separates liability and expense accounts for accurate reporting.

A reliable system also helps avoid under- or overpaying, and supports smooth reporting to HMRC or IRS.

Regular audits and reconciliations

Mistakes happen, but they shouldn’t snowball. Regular audits are essential to catch and fix issues early. These are the things to keep an eye on:

• Match employee pay with reported gross pay and deductions.

• Reconcile your payroll liability account with actual payments and business expenses.

• Confirm wages payable have been settled and not sitting as overdue liabilities.

• Check that all voluntary payroll deductions have been forwarded to the correct third parties.

These reviews should be part of your monthly or quarterly routine, especially if you’re managing multiple locations or using different payroll expense accounts.

Staying updated with legislation

Payroll laws don’t stand still. Whether it’s a new tax law, changes in income tax brackets, or updates to state unemployment tax act thresholds, staying informed is a must. Here are some ways to stay current:

• Subscribe to updates from HMRC and IRS

• Follow state labour departments for local income tax and SUTA changes

• Use payroll companies that provide alerts and automatic software updates

• Work with a qualified payroll accountant or advisor

Keeping your finger on the pulse of legislation ensures your payroll related costs remain predictable and your business stays compliant year-round.

Common challenges and solutions

Managing payroll liabilities isn't always straightforward. Between timing, tax rules, and human error, even seasoned employers can run into problems. Here’s how to tackle the most common pitfalls with confidence.

Cash flow management

Covering payroll expenses means managing your outflows across the entire month or quarter. Here are some strategies to avoid cash shortfalls:

• Use a separate payroll bank account: This keeps payroll related costs isolated from other business expenses, making it easier to plan ahead.

• Forecast liabilities: Regularly review upcoming tax payments, employee compensation, and payroll service costs.

• Stagger pay dates if legal: For businesses with cash flow tight spots, alternating pay periods for different teams may help.

• Build a payroll reserve: A buffer fund can protect you against unexpected increases in employment costs like bonuses, garnishments, or new tax rates.

Handling errors

No system is perfect. When something goes wrong in your payroll process, the priority is fixing it quickly and keeping communication open. Here's how to respond:

• Identify the root cause: Was it incorrect employee data, a misapplied tax rate, or a system glitch?

• Correct payroll records: Update your payroll accounting system and reissue corrected employee paychecks or tax forms.

• Communicate clearly: Let employees know what happened, how it’s being fixed, and when they’ll see the correction.

• Adjust future processes: Add checks to prevent the same error; like flagging duplicate entries or setting caps on voluntary deductions.

Regular use of audits, system alerts, and strong internal controls can help limit these incidents.

Simplify payroll liabilities with Shiftbase

Managing payroll liabilities doesn’t have to be a juggling act. With Shiftbase, you can centralise all the data needed to run payroll accurately—from employee scheduling to time tracking and absence management. Our platform gives you real-time access to hours worked, leave balances, and overtime, helping you avoid payroll surprises and stay compliant.

Thanks to our payroll integration, businesses can streamline salary calculations, automate deductions, and eliminate manual errors. Whether you're exporting data to Excel or connecting with third-party payroll systems, Shiftbase keeps everything organised and up to date—saving time and reducing costly mistakes.

Take the hassle out of managing payroll liabilities. Try Shiftbase free for 14 days and experience how effortless accurate payroll can be.

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