PAYROLL LIABILITIES: Salaries, Taxes, Deductions, and Employer Contributions
- Graziano Stefanelli
- Jun 7
- 2 min read
Payroll liabilities are obligations arising from compensating employees and remitting associated taxes and withholdings. They include wages earned but unpaid, income taxes withheld, social security contributions, and employer payroll taxes.
1. What Are Payroll Liabilities?
Payroll liabilities are amounts owed by an employer to employees and government authorities as a result of employment.
They include:
Gross wages and salaries earned by employees
Income taxes withheld from employee pay
Employee benefit deductions (health, retirement, etc.)
Employer contributions to taxes or benefit plans
These liabilities accumulate with each payroll cycle and must be settled promptly to comply with labor and tax regulations.
2. Payroll Components and Journal Entry
Let’s break down a typical payroll example:
Gross salary: €5,000
Employee income tax withheld: €750
Social security (employee share): €500
Health insurance deduction: €250
Employer social security: €500
Employer health contribution: €300
Net pay (to employee): €3,500
Journal entry at payroll date:
debit Salaries Expense ....................................................... 5,000
debit Payroll Tax Expense (employer share) ..................... 800
credit Withholding Payable (taxes, SS, insurance) .......... 1,500
credit Cash (net payment to employee) ........................... 3,500
credit Social Security Payable (employer share) .............. 500
credit Health Contribution Payable (employer share) ...... 300
This entry reflects both employee and employer portions of payroll costs and liabilities.
3. Payroll Tax Liabilities
Employers are responsible for withholding and remitting:
Party | Type of Tax |
Employee | Income tax, social security, local taxes |
Employer | Social security, unemployment, health |
The amounts withheld from employee pay are liabilities until paid to tax authorities.
Failure to remit can result in significant penalties.
4. Timing and Accruals
If payroll is incurred near month-end but paid in the next period, the employer must accrue both wages and payroll taxes.
Example: €20,000 in gross wages earned in last 3 days of December but paid January 5.
Adjusting entry on Dec 31:
debit Salaries Expense ............................................ 20,000
credit Accrued Salaries Payable ................................ 20,000
Taxes may also need to be accrued if not yet calculated or remitted.
5. Employer Benefit Contributions
In addition to salaries and taxes, employers may contribute to:
Pension plans or retirement funds
Health insurance premiums
Meal or transport subsidies
Bonuses and commissions
These costs are either:
Accrued monthly if known
Estimated via provisions if variable
6. Financial Statement Effects
Balance Sheet:
Current liabilities: Salaries Payable, Tax Withheld, Social Security Payable
Income Statement:
Salaries, wages, payroll taxes, and benefit contributions recorded as expenses
Cash Flow Statement:
Salaries paid and taxes remitted appear under operating activities
7. Internal Controls and Payroll Audits
Proper payroll management includes:
Segregation of duties (HR vs. accounting vs. payment)
Approval processes for bonuses, raises, or off-cycle payments
Reconciliation of payroll reports with journal entries and tax filings
Protection of sensitive employee data
Regular internal audits help detect fraud, misclassification, or over/underpayment issues.
8. Payroll Liabilities vs Expenses
Element | Payroll Expense | Payroll Liability |
Timing | When services are performed | Until payment is made |
Financial Statement Line | Income Statement | Balance Sheet |
Example | Gross salary, employer taxes | Withholding, unpaid wages |
Key take-aways
Payroll liabilities include employee net pay, tax withholdings, and employer contributions.
Accurate, timely recording is essential for legal compliance and financial accuracy.
At period-end, accrued payroll entries ensure expenses are matched to earned periods.
Employers must maintain strong controls and reporting to manage payroll risks.
_____________ FOLLOW US FOR MORE.
DATA STUDIOS
