Taxable fringe benefit .

This would be the problem: "I understand the Payroll Item side of the set up -  and I end up with a liability on the balance sheet for employee vet services. "

You have no Liability; there is nothing you are paying to another party.

The Fringe Benefit Company Contribution Item needs to be linked to One Expense account for both the "expense" account link and the "liability" account link. It needs to be a Wash. It is Added to the paycheck for taxes to compute, but not Added as takehome and not paid out anywhere.

You don't have additional Expense, either. You already incurred the costs for operations. If you really want to see this as Revenue, you would need to Charge a customer name. Then, set up an Other Current Asset account and make an Other Charge Type item that links to that Other Current Asset account. Name them both "Employee Loan." Put that Loan item on a Credit Memo to the customer name and apply it to the invoice.

Now edit your Payroll Fringe benefit item. Where you linked the Liability account, which is creating a Credit, change that to the same Employee Loan account other current asset. This would be the amount from the Sale. Now you have the Sale paid by running a Fringe Benefit through payroll.

Either it is a wash as Taxable value only; or you want Income, too? Which is it?

When you edit that payroll item and change the account links, and Save it, QB offers to Move Existing data for you. Let it do this.

I think your solution is a simple journal entry to offset the 'vet services liability' against the accounts receivable balance.

When the employee received the vet services, the clinic most likely recorded:

Dr. Accounts Receivable

      Cr. Revenue

You, the bookkeeper, figured out how to record this for proper reporting on the W-2, and that results with a credit on the balance sheet (i.e., the vet services liability).

The 'real credit' should have been against the Accounts Receivable balance, but you could not do that with the payroll tool you are using (assuming QB P/R).  Thus the creation of the vet services liability credit.

To remove this credit, create a journal entry against Accounts Receivable.

Dr.  Vet Services Liability

     Cr. Accounts Receivable

I hope this was helpful for you.

In any of the QB programs, it is best to avoid JE when you want Names to be used, since you just bypassed the reporting activity for that name, you just bypassed Sales reporting, you just bypassed Cash vs Accrual Basis differentiation. You avoid a JE for AP, AR, QB Payroll, Inventory, Sales, Sales Taxes.

The error is simple; there is never a Liability for a Fringe Benefit. The point is to show a Value that is Taxed, but not a value that is then Added to the paycheck takehome nor a Liability to be paid out later. There is no Liability involved, so you set up the payroll item not to create Liability in the first place. There is no Reason to create something that you know you also have to Move or adjust because it wasn't the right thing in the first place.

All that matters is, if this was a sales event or not. If so, there is a Value owed, not a liability but an Other Asset to the employer = the services are charged, but not being paid for in Cash. It's being considered a Value that the employee owed back to the employer.

You "pay" the Invoice with the credit memo that reflects this "sales total" really is Employee Loaned amount = other current asset. Then, the payroll Gross Addition is the net deduction to "repay" the employer. The Employee Advance Other Current Asset account is now 0.

It's the same as: the Customer could have paid, but the Employee wanted it Deducted from their paycheck. The Employer wants to Bonus this to the employee, but avoid adding to takehome = a Fringe Benefit, not more money.

There is no JE in any of this.