In plain English
Examples: income tax withholding, employer payroll taxes and benefit deductions. They rise at each payroll and fall when you deposit.
Reconcile them to returns and deposits each quarter.
Why it matters
When you run payroll, part of each paycheck is held back for taxes and benefits. That money belongs to employees and government agencies, not to the business. Spending it on rent or inventory is a common way small employers fall behind, and payroll tax problems can become personal problems for the people responsible.
If the liability accounts in your books never return to zero after deposits, it is a sign of a missing payment or a miscoded one.
Worked example
Withholding of $2,000 for the quarter and deposits of $1,950 leaves $50 owed.
How to handle it
- Let your payroll system or integration create the liability entries at each pay run instead of recording net pay only.
- Record each tax deposit against the matching liability account, not as a new expense.
- After each filing period, compare the liability balances to the payroll returns and deposit confirmations.
- Investigate any balance that remains after all deposits for the period have cleared.
Common mistakes
- Recording only net paychecks, which leaves withholdings and employer taxes out of the books entirely.
- Coding tax deposits to a tax expense account, which counts the employer cost twice and leaves the liability showing as unpaid.
- Treating withheld money as available cash, which can leave the business unable to make the next deposit.
Not the same as: Accrued expense
An accrued expense is any cost incurred but not yet billed or paid. Payroll liabilities are a specific kind of amount owed, mostly withholdings that are collected from employees and held in trust until remitted. See Accrued expense.
Go deeper
- How to Reconcile Payroll Liability Accounts: A step-by-step method to prove that payroll taxes withheld, deposited and filed agree with your books each quarter.
- New Jersey payroll taxes and filings for small employers: An overview of the federal and New Jersey payroll taxes a small employer pays and files, with the reports that follow each quarter and year.
Related terms
- Petty cash: A small cash fund for minor expenses, kept with receipts and replenished to a fixed amount.
- Prepaid expense: A cost paid in advance that is recorded as an asset and expensed over the period it covers.
- Owner's draw: Money a sole proprietor or partner takes out of the business for personal use.
Common questions
What are payroll liabilities?
Amounts withheld from pay or owed by the employer that have not yet been remitted.
Can you give an example of payroll liabilities?
Withholding of $2,000 for the quarter and deposits of $1,950 leaves $50 owed.
Why does my payroll liability account have a negative balance?
Usually a deposit was recorded but the related payroll was not, or a deposit was coded to the wrong liability. Compare each account to the payroll register for the period to find the mismatch.
Who should I ask about payroll deposit schedules?
Your payroll provider or accountant can tell you your deposit schedule. The rules depend on your situation, so check the current IRS and state instructions rather than relying on a general rule.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.