Do your clients start to sweat when they hear the word “liability”? The word calls to mind a sense of overwhelming responsibility and obligation. It’s often associated with debts, burdens, and worse. But you know that if you manage and track them properly, payroll liabilities don’t have to be so scary.
However, it can be difficult even to identify payroll liabilities. Beyond that, it can be even more challenging to track and manage these costs and debts effectively.
Consider this post your crash course in payroll liabilities. We’ll cover what they are and provide expert tips for ease of understanding, tracking, and managing your clients’ payroll tax liabilities.
What Are Payroll Liabilities?
Before we get into the nitty-gritty of how you can better guide your clients through their liability management processes, let’s first answer a foundational question: What are payroll liabilities? Payroll liabilities are any payroll costs your client owes and hasn’t yet paid. Essentially, your client is obligated to pay anything payroll-related, including gross wages, payroll taxes, payroll service costs, and more.
It’s essential to understand and manage payroll liabilities because, without solid handling of these costs, your client won’t be able to create an adequate budget for their business. They will also struggle to accurately estimate labor costs, which can cause trouble when they attempt to grow their business.
Additionally, your client could face penalties if they are not handling their payroll liabilities properly. For example, missing a deadline on payroll taxes could cost them a penalty of up to 15% of the original cost. If your client doesn’t have the funds to cover employee wages, the consequences can be even more severe, resulting in lawsuits and injunctions.
Related Read: 7 Aspects of Payroll Compliance
In short, effective payroll liability management is essential for your clients. Let’s explore our nine expert tips.
For more information and resources, refer to our CPA Partners page.
Tips for Understanding Payroll Liabilities
Our first set of tips is related to understanding your clients’ payroll liabilities.
Tip 1: Understanding Payroll Liabilities vs. Payroll Expenses
One common point of confusion regarding payroll liabilities is understanding how they differ from regular payroll expenses. These terms are often used interchangeably, but there are some slight differences. Essentially, payroll liabilities are costs your clients are obligated to pay due to hiring workers. In contrast, payroll expenses are simply the cost of wages paid to employees.
Tip 2: Understanding Different Types of Payroll Liabilities
As we discussed briefly above, payroll liabilities take several forms. The most common examples are employee wages and payroll taxes, but let’s take a look at some of the more specific payroll liabilities your clients will need to manage:
- FUTA and SUTA: Federal and State unemployment taxes are required for every employer. These taxes are paid only by employers and are collected every pay cycle.
- Wage Garnishments: If your client learns that an employee has a court-ordered wage garnishment, they will need to have a system to withhold the proper amount and forward those funds appropriately properly. These funds must be removed from the employee’s pay before tax deductions, retirement contributions, etc.
- Workers’ Compensation Insurance: Workers’ Compensation Insurance requirements vary depending on the state your client operates within. These calculations will also vary depending on your client’s industry and the size of their business.
- Union Dues: If your client’s employees are in a union, it will be your client’s responsibility to deduct any applicable dues during payroll. Unlike wage garnishments, union dues are deducted post-tax.
- Payroll Service Costs: Your clients’ payroll service costs also fall under payroll liabilities. This includes the fees your client pays to you and any payroll software or payroll management service they employ.
Related Read: How Much Do Payroll Services Cost?
Tip 3: Understanding FICA
FICA, or the Federal Insurance Contributions Act, is one of the chief payroll liabilities your clients will need help managing. FICA is a tax deducted each payroll that costs both the employer and the employee 6.2% of their gross wages for Social Security tax and 1.45% of their gross wages for Medicare taxes.
The simplest way to calculate your clients’ total FICA tax liability is to take the gross pay of all eligible employees and multiply it by 0.0765.
Tips for Tracking Payroll Liabilities
Next, let’s take a look at a few tips you can share with your clients to help them track their payroll liabilities.
Tip 4: Use a Reliable Payroll System
The easiest way for clients to track their payroll liabilities is to use a reliable payroll system. There are many reliable small business payroll software solutions on the market. Help your client select a payroll system capable of automating some processes related to payroll liabilities if possible.
Tip 5: Open a Separate Payroll Bank Account
One of your clients’ chief concerns about payroll liabilities is ensuring that they have the funds available each pay cycle to cover all their payroll liabilities. The easiest way to ensure those funds are available is to keep them in a separate account from the rest of the organization’s cash flow. Opening a separate payroll bank account makes it far simpler to keep a close eye on the funds going toward payroll-related costs each cycle.
Tip 6: Keep Accurate Records
Keeping accurate records is essential for nearly every business process, and payroll liabilities are no different. Some of the records your clients should ensure they’re tracking appropriately include:
- Pay rates
- Tax forms (e.g., Form W-4)
- Collective bargaining agreement
- Direct Deposit information
Tips for Managing Payroll Liabilities
Lastly, we’ll cover a few expert tips for helping clients manage their payroll liabilities.
Tip 7: Scheduling Tips
The human memory isn’t infallible. As a result, it’s easy to forget a deadline or miss a requirement. To avoid the penalties and fees associated with these mental slip-ups, you should encourage your clients to set automated calendar reminders.
These reminders should include deadlines and due dates and the regular deposit schedule. Including reminders for both of these elements will help your client remember when payments are due and help them ensure that they have the funds necessary to cover those payments in the appropriate accounts when that deadline rolls around.
Tip 8: Keep a Cash Reserve
As we covered at the beginning of this post, the consequences of not having the cash on hand to cover payroll can be severe. Encourage your clients to keep a cash reserve on hand to avoid facing these consequences. These funds can be used to cover payroll costs in the event of a mishap related to deposit schedules, a month in the red, or in the face of unexpected costs.
Tip 9: Understand Form 940 and Form 941
Federal Form 940 and Federal Form 941 are essential for any employer paying unemployment taxes. Understanding the differences between these forms, the deadlines required for filing, and more are essential to manage unemployment-related payroll liabilities properly. For more information related to federal form 940, check out our post on the subject!
Need Help Addressing Your Payroll Liabilities?
Helping your clients manage, understand, and track their payroll liabilities can feel overwhelming for even the most experienced CPA. Using the information provided in this post can be an excellent starting point, but to make things simpler and ensure your clients’ success, you may need to call for backup.
ConnectPay’s CPA Partnership program can help your clients get the payroll help they need. For more information, tips, and resources that can help you offer your clients the best service possible, check out our CPA Partners page!