Payroll Tax: The Complete Guide for Employers
Payroll tax explained for small employers: every rate, who pays what, deposit deadlines, penalties, and the one mistake that pierces your LLC.
Payroll Tax
What it is, every rate, who pays what, when the money is due, and why the most compassionate decision you can make is the one that costs you your house
Most guides to payroll tax give you a table of rates and stop. You get every rate here too, but most of what follows covers the part that actually hurts small employers: the deposits, meaning the money and the day it has to leave your account. The rates are the easy part, because your provider applies them automatically.
Here is the situation that ends small businesses, and it does not feel like a mistake when you are in it. Cash is short. You have enough to pay your people or enough to make the tax deposit, not both. So you pay your people, and that decision feels like the decent one because it is.
The IRS has a settled position on that decision. It is willful failure. Your employee, in the government's view, is merely another creditor, and preferring them over the United States is the willfulness. You had a duty to prorate: pay everyone less and make the deposit. The penalty for getting it wrong is personal.
This guide covers all of it for a small US business without a dedicated HR person: every rate, what a hire costs, the deposit schedules, the penalties, the forms, the state layer, and the things that pierce your LLC. FirstHR is not a payroll processor; a provider calculates and deposits your taxes. This is general information, not tax advice.
What Payroll Tax Is
Payroll tax is tax on wages, levied at flat rates, to fund specific programs.
Three properties define them and each has a consequence.
Flat. Social Security is 6.2 percent whether someone earns $30,000 or $150,000. No brackets, no personal circumstances. The only nonlinearities are the wage base, which is a ceiling, and the Additional Medicare Tax, which is a surcharge.
Earmarked. The money funds named programs rather than general spending. Social Security tax funds Social Security. This is why they exist as separate lines rather than being folded into income tax, and why they are sometimes called contributions.
Shared. The property that costs you money. When your employee pays $100 in Social Security, you pay another $100, out of business funds, and it never appears on their pay stub.
Who Pays What
You and the employee both pay FICA, you pay almost all of the unemployment tax, and income tax comes entirely out of the employee's pay. That split is the question underneath every other question in this article.
| Tax | Employee pays | Employer pays | Notes |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | Both stop at the annual wage base |
| Medicare | 1.45% | 1.45% | No cap. Every dollar, forever |
| Additional Medicare | 0.9% | Nothing | Above $200,000. You withhold it and do not match it |
| Federal income tax | Everything | Nothing | You are a courier. Not a cent of it is yours |
| FUTA | Nothing | Everything | 0.6% effective. About $42 per employee per year |
| SUTA | Nothing, in most states | Everything | Alaska, New Jersey, and Pennsylvania also take an employee contribution |
| State income tax | Everything | Nothing | Same as federal. You withhold and remit |
What is the employer portion of payroll taxes? Look at the Employer pays column. Where it says "Nothing," you are administering somebody else's money. Where it has a number, that money is leaving your account and not coming back.
What are ER taxes on a payroll report? ER is short for employer, so ER taxes are your share: the Social Security and Medicare match, FUTA, and SUTA. EE, short for employee, is what was withheld from the person's pay and is being remitted for them. ER is a cost that reduces your profit, while EE was never yours. These are reporting conventions, not statutory terms, so providers label the columns differently.
Every Rate, in One Table
Here is every rate in one table: who pays it, where it stops, and which form reports it.
| Tax | Employee | Employer | Combined | Cap | Form |
|---|---|---|---|---|---|
| Social Security (OASDI) | 6.2% | 6.2% | 12.4% | Yes. An annual wage base | 941 |
| Medicare (HI) | 1.45% | 1.45% | 2.9% | No cap. Every dollar | 941 |
| Additional Medicare | 0.9% | Nothing | 0.9% | Starts above $200,000 | 941 |
| Federal income tax | Their W-4 | Nothing | Varies | No cap | 941 |
| FUTA | Nothing | 0.6% effective | 0.6% | First $7,000 each | 940 |
| SUTA | Nothing, usually | Experience-rated | Varies | A state wage base | State |
| State income tax | Varies | Nothing | Varies | No cap | State |
Per IRS Publication 15, the Employer's Tax Guide, these are the rates you actually apply. The Social Security wage base rises most years, so a figure printed in an article will eventually be wrong.
Two rows in that table are structurally odd and each gets its own treatment below. Additional Medicare is a payroll tax with no employer share, which makes it behave like an income tax in a payroll tax's clothing.
SUTA is the other one. It is the only employment tax whose rate is specific to you rather than set by statute. Of the two, only Additional Medicare reliably shows up on the pay stub, as extra withholding a high earner will notice and ask about. SUTA appears there only in the three states that take an employee share.
FICA in Detail
FICA is where most of the money is, and where the employer match lives.
| Social Security (OASDI) | Medicare (HI) | |
|---|---|---|
| Employee rate | 6.2% | 1.45% |
| Employer rate | 6.2% | 1.45% |
| Combined | 12.4% | 2.9% |
| Wage cap | Yes. An annual wage base, rising most years | None |
| What happens at the cap | Both sides stop for the rest of the year | Nothing. It continues on every dollar |
| Funds | Retirement, disability, survivors | Hospital insurance |
The employee's combined FICA is 7.65 percent. Yours is the same 7.65 percent, out of your own funds. Together, according to IRS Topic 751, the two shares add up to 12.4 percent for Social Security and 2.9 percent for Medicare: 15.3 percent of every dollar of wages up to the Social Security wage base.
The wage base, and the autumn surprise
Social Security stops at the annual wage base. According to IRS Topic 751, that ceiling is $184,500 for 2026. Once an employee's year-to-date wages cross it, the Social Security line vanishes from their stub and their net pay jumps for the rest of the year.
Two consequences, and the second one is the useful one. First, they will come and ask you about it, having concluded that payroll made an error in their favor. Second, your matching contribution stops at exactly the same moment, so your cost for that person falls for the rest of the year and resets in January.
If you employ several people near the wage base, that makes your payroll tax expense genuinely lumpy across the year, front-loaded and then tapering. Worth modeling rather than discovering.
The Additional Medicare Tax
Per the IRS questions and answers on the Additional Medicare Tax, an employer must withhold an additional 0.9 percent on wages paid to an employee above $200,000 in a calendar year, beginning in the pay period the threshold is crossed and continuing to year end.
And there is no employer match. You withhold it and you do not pay it, which makes it the only item on the payroll tax list that behaves this way.
The wrinkle: you withhold based on the wages you paid, at $200,000, without regard to filing status. But the employee's actual liability depends on their household situation, so they may end up owing more or less than you withheld. Both are resolved on their return, and neither is your problem once you have withheld correctly.
FUTA and SUTA, the Taxes You Pay Alone
Both unemployment taxes come out of your business funds. In almost every state nothing is withheld from the employee for them, so in practice the whole bill is yours.
FUTA
Per IRS Topic 759, the statutory FUTA rate is 6.0 percent on the first $7,000 of each employee's wages. Employers who pay their state unemployment tax in full and on time receive a credit of up to 5.4 percent, dropping the effective rate to 0.6 percent.
| Figure | What it means | |
|---|---|---|
| Statutory rate | 6.0% | What you would pay with no state credit |
| Maximum credit | 5.4% | Earned by paying SUTA in full and on time |
| Effective rate | 0.6% | What almost every employer actually pays |
| Wage base | First $7,000 per employee | It stops there. It does not scale with salary |
| Cost per employee | About $42 a year | Which is why nobody remembers it exists |
| Deposit trigger | Quarterly, once liability exceeds $500 | Otherwise it rolls into the next quarter |
| Deposit due dates | April 30, July 31, October 31, January 31 | The last day of the month after each quarter ends |
| Reported on | Form 940, annually | Due January 31 |
As for when FUTA is due, per the same IRS topic: you deposit it by the last day of the month after the quarter ends, but only once your accumulated liability passes $500. Below that it carries forward. If the fourth quarter total is still $500 or less, you can simply pay it with Form 940 by January 31.
Forty-two dollars a year per employee. Trivial, and the reason to know about it is the exception.
SUTA
State unemployment tax is the strange one, because your rate is personal to you.
States assign an experience rating based on your history of unemployment claims. Lay people off, they claim benefits, your rate goes up. Do not, and it drifts down. New employers start at a standard rate until they have a history to be rated on.
The result is worth internalizing: firing people is more expensive than it looks, and the extra cost is spread invisibly across your SUTA rate for years afterward. It is the only tax in this entire article that responds to how you actually run the business.
Among the unemployment taxes, SUTA is the one place employees sometimes contribute. In most states they do not. According to the Department of Labor comparison of state unemployment insurance laws (2023), employees pay a share of state unemployment tax as well in exactly three states: Alaska, New Jersey, and Pennsylvania.
What Payroll Tax Actually Costs You
On a $60,000 salary, employer payroll tax costs you roughly 8 to 15 percent on top, and your state unemployment tax decides where in that range you land. Here is where the rates become a number you can put in a budget.
That is payroll tax alone. Before benefits. Before workers compensation. Before equipment.
How much is employment tax for a small business with a team rather than one hire? Multiply it out. Ten employees at $60,000 each carry $46,320 a year of FICA match and FUTA before state unemployment tax, which then adds anywhere from nothing to about $4,500 per person, depending on your state and your layoff history.
And note the last row of that table, because it is the source of a persistent asymmetry. Your entire employer share is invisible to the employee. They see their own 7.65 percent on the pay stub and reasonably conclude that is the cost of these programs. It is half the cost. You paid the other half, and there is nowhere they could have learned that.
How to Calculate Payroll Taxes
Calculating payroll taxes means applying flat percentages to one paycheck, twice: once for what you withhold from the employee, and once for what you owe on top of it. Take the gross wages for the period, adjust the base for pre-tax deductions, apply each rate, and stop at each wage base.
Only one line in the whole calculation is not a percentage. Federal income tax withholding comes from the employee's Form W-4 and the withholding tables in IRS Publication 15-T, which is why no article can give you a figure for it. Everything else is multiplication you could do on paper.
The table below runs the whole thing for a single $3,000 paycheck. Assume it is the employee's first run of the year, so no wage base has been reached, and assume no pre-tax deductions, so the base is the full gross.
| Line | Amount | How it was calculated |
|---|---|---|
| Gross wages for the run | $3,000.00 | The base every other line comes from |
| Employee Social Security | $186.00 | $3,000 at 6.2 percent, withheld from their pay |
| Employee Medicare | $43.50 | $3,000 at 1.45 percent, withheld from their pay |
| Employee federal income tax | From Publication 15-T | Not a flat rate. It depends on their Form W-4, so no single figure fits |
| Employer Social Security | $186.00 | Your match, out of business funds |
| Employer Medicare | $43.50 | Your match, out of business funds |
| FUTA | $18.00 | $3,000 at 0.6 percent, because year-to-date wages are still under $7,000 |
| SUTA at an illustrative 2.5 percent | $75.00 | $3,000 at your assigned state rate. Yours will be different |
| Your cost on top of the $3,000 | $322.50 | About 10.75 percent, and none of it appears on the pay stub |
| What goes into the Form 941 deposit | $459.00 plus the withheld income tax | Employee FICA of $229.50, your matching $229.50, and the income tax you withheld |
Two things in that last row are worth reading twice. FUTA and SUTA are not part of the 941 deposit: FUTA is deposited separately and reported on Form 940, and SUTA goes to the state on the state's own schedule. And the deposit is more than double what came out of the employee's pay, because your match travels with it.
To calculate employer payroll taxes for a year rather than a run, you cannot simply multiply by the number of pay periods. The wage bases make it non-linear. FUTA stops after the first $7,000, SUTA stops at your state's base, and Social Security stops at the annual wage base for your higher earners, so your cost per person falls as the year goes on.
Deposits and Deadlines: The Part That Actually Matters
Payroll tax deposits are due on a schedule the IRS assigns you, either monthly or semiweekly. Everything above was arithmetic your provider does automatically. This is the part that can hurt you, and almost no guide covers it properly.
The first thing to understand is that filing is not paying. You deposit the money throughout the quarter and you file a return summarizing it afterward. A perfect Form 941 does not help you if the deposits were late. The penalties attach to the deposits.
You do not choose your schedule
Per IRS Topic 757, your schedule is determined by your total tax liability during a lookback period: the twelve months beginning July 1 of the second preceding year and ending June 30 of the prior year. Report $50,000 or less and you are monthly. More and you are semiweekly.
That rule has a consequence people miss. Your schedule this year was set by what you reported in a window that ran from about eighteen to six months before the year began. If you have grown, you may have crossed the threshold, and the IRS moved you to semiweekly, and you are still depositing monthly because that is what you have always done.
Deposits key off the payday, not the work
Deposits follow the payday, and that matters more than it sounds. The IRS is explicit that deposit rules are based on when wages are paid, not earned. Wages earned in June but paid in July belong to the July deposit obligation.
Change your pay schedule and you change your deposit rhythm. A semiweekly depositor moving payday from Friday to Tuesday has just changed which day their deposit is due, and that is exactly the kind of thing that generates a penalty in a month when nobody was thinking about it.
How the money actually moves
Federal tax deposits must be made by electronic funds transfer, for example through the Electronic Federal Tax Payment System (EFTPS), a free Treasury service. Your payroll provider almost certainly does this for you. Confirm that they do, confirm which schedule they think you are on, and confirm it again if your business grows meaningfully. Note, too, that the debit hits your account before the money reaches employees.
Per IRS guidance on depositing and reporting employment taxes, the deposit and the return are separate obligations with separate deadlines, and satisfying one does nothing for the other.
Penalties: The Business Ones
Miss a deposit and the penalty escalates by the day. This is the mild version of what can happen.
Note what that ladder is measured in. Percent of the deposit, not a flat fee. So the penalty scales with your payroll, and a business with thirty employees is not paying thirty dollars for being a week late.
And note the top tier. Under 26 U.S.C. 6656, 15 percent applies once the tax is still unpaid 10 days after the first IRS delinquency notice. That is the tier for employers who were told and did not act, and the IRS does not treat that the same way it treats an honest oversight.
The Penalty That Follows You Home
The penalty that follows you home is the Trust Fund Recovery Penalty (TFRP), which makes a responsible person, not just the company, liable for withheld tax that was willfully left unpaid. This is the section this entire article exists for. Everything above is a business cost. This is not.
The federal income tax and the employee share of FICA that you withhold are trust fund taxes. You are holding money that belongs to your employee, in trust for the government. It was never yours, not for a moment: under 26 U.S.C. 7501, tax you withhold is held as a special fund in trust for the United States.
Read that last sentence again. It is not about fraud. It is not about hiding money. Paying other bills instead of the deposit is the definition.
The decision that destroys people
And now the specific case, which is the reason this article is written the way it is.
That is not an interpretation and it is not a scare story. According to the Internal Revenue Manual (IRM 8.25.1) and the case law it cites, the payment of net wages to employees when funds are not available to pay the withholding taxes is a willful failure to collect and pay over.
The manual goes further than that. A responsible person has a duty to prorate the available funds between the government and the employees, and for this purpose an employee owed wages is merely another creditor of the business, so a preference for employees over the government constitutes willfulness.
Sit with what that means. The humane instinct, the one that says "my people have families and the IRS can wait a month," is the instinct that makes you personally liable.
What responsible person actually means
A responsible person is anyone with real authority over which bills get paid. That is wider than you think, and it is not about job titles.
| Detail | Why it matters | |
|---|---|---|
| Who can be liable | Officers, partners, sole proprietors, and employees | Including a bookkeeper, controller, or office manager |
| The test | Whether you had the power to direct which creditors got paid | Not your title. Your actual authority over the money |
| Following orders | An employee who merely paid bills as directed is not responsible | But one who decided which bills to pay is |
| Willfulness | Voluntarily, consciously, intentionally. Or reckless disregard | No evil intent required. Plain indifference is enough |
| Joint and several | The IRS can assess the full amount against each responsible person | They will collect from whoever has the assets. Once |
| Bankruptcy | Not dischargeable | It follows you after the company is gone |
| What it covers | Withheld income tax and the employee share of FICA | Not the employer share. That is the company's debt, not yours |
The row about the bookkeeper deserves a moment, because owners assume the exposure is theirs alone. It is not. Anyone who had significant control over which bills were paid, and knew or should have known the taxes were unpaid, is in scope.
The person you hired to handle the money, precisely so that you would not have to, is included. That is worth saying out loud to them before they find out from a letter.
The bankruptcy row is the other one that matters. Under 11 U.S.C. 523(a)(1)(A), taxes of the kind specified in 11 U.S.C. 507(a)(8) are excepted from discharge, which means a bankruptcy does not wipe them out. That list includes a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.
A personal bankruptcy, in other words, does not clear a trust fund assessment. It keeps running after the company has stopped.
Per the IRS page on the TFRP, the way to avoid it is stated in one line: make sure all employment taxes are collected, accounted for, and paid to the IRS when required. Make your deposits on time. That is the entire prevention strategy, and it works, and it is available to everybody.
The Cash Flow Reality Nobody Models
Never having to choose between payroll and the deposit is entirely a cash flow problem. The section above was about what happens when you get it wrong; this one is about never getting there.
Payroll is bigger than payroll
When you run a $20,000 payroll, $20,000 does not leave your account. Here is what actually goes.
| Component | Roughly | When it leaves |
|---|---|---|
| Net pay to employees | About $14,000 | On or before payday, via ACH |
| Withheld taxes: income tax and employee FICA | About $6,000 | On your deposit schedule. It was never yours |
| Your employer FICA match | About $1,530 | With the deposit. This is your money |
| FUTA and SUTA | A few hundred | Quarterly, or with the return if small |
| What actually leaves your account | About $22,000 | Not $20,000. And not all on the same day |
Illustrative, and the shape is what matters. Your $20,000 payroll is a $22,000 cash outflow, and the components leave on different days.
That timing is the specific trap. The net pay goes out on payday. The deposit goes out later. And in the gap between them, there is money in your account that is not yours, and it looks exactly like working capital, and it is available to spend, and spending it is the thing that ends businesses.
What to actually do about it
The third item is the one worth taking seriously. Moving the withheld money into a separate account on payday feels like an overreaction right up until the month you would otherwise have spent it. It costs nothing, it takes one transfer, and it converts a temptation into an impossibility.
All five of those steps come down to one number you have to write down somewhere: what actually leaves the account on each run, and on which day. The workbook below is where that goes, with a separate column for the withheld money so the trust fund total is never invisible.
| A | B | C | D | E | F | G | H | I | J | K | L | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Pay date | Pay period | Gross wages | Net pay to employees | Income tax withheld | Employee FICA withheld | Trust fund total | Employer FICA | FUTA and SUTA | Total cash out | Date the funds must clear | Trust fund moved to the tax account on |
| 2 | ||||||||||||
| 3 | ||||||||||||
| 4 | ||||||||||||
| 5 | ||||||||||||
| 6 | ||||||||||||
| 7 | ||||||||||||
| 8 | ||||||||||||
| 9 | ||||||||||||
| 10 | Formula | Trust fund total = income tax withheld + employee FICA withheld | ||||||||||
| 11 | Formula | Total cash out = net pay + trust fund total + employer FICA + FUTA and SUTA | ||||||||||
| 12 | Note | The trust fund column is not yours. It sits in your account for a few days as a matter of mechanics, not ownership. |
Fill it in for every run, including the quiet months. The value is not the arithmetic, which your provider already does. It is that the trust fund column sits in front of you before the money is spent rather than after.
The workbook is a cash record and nothing more. A register that logs each deposit against its due date and confirmation number, and ties the quarter back to your return, is a different tool, and it belongs with the deposit schedule rules.
If You Are Already Behind
If you are already behind, you have more options than you think, and the worst thing you can do is nothing.
Everything so far has been about doing it right. But a great many people find an article like this because they have already gotten it wrong, and nobody writes that section, so here it is.
Penalties can be removed. Ask.
The failure-to-deposit penalty is not automatically permanent. The IRS has a formal relief mechanism, and small employers routinely fail to use it because they do not know it exists.
If you have just been penalized for a single late deposit after years of careful compliance, there is a very good chance that payroll tax penalty can be removed, and the process may be as simple as a phone call.
Reasonable cause, and the two excuses that do not work
If you do not have a clean three-year history, the second route is reasonable cause: you exercised ordinary business care and prudence, and were nevertheless unable to comply. The IRS page on reasonable cause relief lists what counts.
| Reason | Generally accepted? | Note |
|---|---|---|
| Serious illness or death, of you or immediate family | Yes | With documentation. Dates matter |
| Fire, natural disaster, or civil disturbance | Yes | This is the paradigm case |
| Unavoidable absence | Yes | If genuinely unavoidable and documented |
| Inability to obtain records | Yes | Listed by the IRS, but you have to show the ordinary care |
| System issues that delayed an electronic filing or payment | Yes | Also on the IRS list of qualifying reasons |
| Erroneous written advice from the IRS | Yes | A statutory exception rather than reasonable cause, and it has to be in writing |
| You did not have the money | No | By itself, lack of funds is not reasonable cause |
| Your accountant was supposed to do it | No | You stay generally responsible even when someone else handles your taxes |
| You did not know | No | Lack of knowledge is not a defense |
Three rows say No, and two of them are the things every employer in trouble actually says.
The IRS states plainly that by itself, lack of funds is not reasonable cause for failing to pay or deposit taxes due. That one stings, because it is the precise situation most employers who miss a deposit are actually in. Not having the money is not an excuse for not depositing the money.
Relying on your accountant is generally not reasonable cause either. The same IRS page says you are generally responsible for complying with tax law even when somebody else handles your taxes, and that you should know what your preparer files and get proof that the payment was sent on time.
Delegating the task does not delegate the liability, and this is worth knowing before you assume your provider has it covered.
You made an error on a return
Errors on a Form 941 are corrected with Form 941-X, the adjusted employer's quarterly return. It is a real mechanism, it is used routinely, and discovering that you overstated or understated your liability is not a catastrophe if you correct it promptly.
The important detail is timing. Per the Form 941-X instructions, you can generally correct an underpayment of employment tax interest-free if you do two things: file by the due date of the return for the quarter in which you discovered the error, and pay what you owe when you file.
Miss that due date and the interest-free treatment is gone. Finding the error is not the expensive part. Sitting on it is.
If you have already received an IRS notice
Do not put it in a drawer. This is the single most common and most expensive response, and it is understandable, and it makes everything worse.
The Forms
Four federal forms carry the whole of payroll tax filing, plus a state layer that varies.
Notice that Form 941 mixes the two categories: the income tax you merely withheld sits on the same return as the FICA you actually paid. That is convenient administratively and it is exactly why owners lose track of which money was theirs.
Form 940, by contrast, is pure employer cost. There is no employee column on it, because there is no employee contribution to FUTA.
The one exception to depositing
Per IRS Topic 757, if your employment tax liability for the preceding quarter or the current quarter is less than $2,500, you may pay the current quarter with your timely filed return rather than making deposits. The condition is that you did not incur a $100,000 next-day deposit obligation during that quarter.
This small-liability rule is genuine relief for the smallest employers, and for a Form 941 filer it is the only standing exception to making deposits. Note the word "timely." The exception depends on the return being filed on time. It is not a license to be late.
What Counts as Wages for Payroll Tax
Almost everything you pay an employee for their work counts as wages for payroll tax: salary, hourly pay, overtime, bonuses, commissions, reported tips, severance, and paid-out time off. The exceptions are few, and the question matters more than it sounds, because the answer determines the base every rate is applied to.
What taxable wages actually means
Taxable wages are the part of an employee's pay that a particular tax is applied to, and the word doing the work in that sentence is particular. There is no single taxable wage figure for a person. The same paycheck produces one number for income tax withholding, another for Social Security, and another for Medicare.
You can see the three side by side on any W-2. Box 1 reports the wages subject to federal income tax withholding, Box 3 reports Social Security wages and stops at the annual wage base, and Box 5 reports Medicare wages with no ceiling at all. Per the IRS instructions for Forms W-2 and W-3, those three figures routinely differ for the same employee in the same year.
Taxable earnings and taxable compensation are the same idea wearing different names, and payroll systems use all three interchangeably. What matters operationally is which tax you are asking about, because the base moves underneath you. The table below is the answer for FICA, which is the base most employers get wrong.
| Payment | Subject to FICA? | Note |
|---|---|---|
| Salary and hourly wages | Yes | The obvious case |
| Overtime | Yes | Wages are wages |
| Bonuses and commissions | Yes | Supplemental wages, but fully subject to FICA |
| Tips reported by the employee | Yes | And you owe the employer match on them |
| Severance | Yes | Still wages, even after employment ends |
| PTO paid out | Yes | It is compensation |
| Group-term life insurance above $50,000 | Yes | Imputed income. Subject to FICA, though income tax withholding is not required on it |
| Employer contributions to a qualified retirement plan | No | The employer contribution is not FICA wages |
| Employee 401(k) contributions | Yes | Pre-tax for income tax. NOT pre-tax for FICA. This surprises everyone |
| Health premiums under a Section 125 plan | No | These genuinely reduce FICA wages |
| Accountable plan reimbursements | No | Substantiated expenses are not wages |
| Nonaccountable allowances | Yes | A flat car allowance with no substantiation is wages |
Three rows in that table cause almost all the confusion.
The 401(k) row. A traditional 401(k) contribution reduces the employee's taxable income for income tax, so their withholding drops. It does not reduce FICA wages. Social Security and Medicare are calculated on the full gross, before the retirement deduction. So an employee who increases their contribution sees their income tax fall and their FICA stay exactly where it was, which looks like an error and is not.
The Section 125 row. Health premiums taken through a cafeteria plan do reduce FICA wages, which means they save the employee income tax and FICA, and they save you your matching FICA as well. That is a genuine saving on both sides and it is one of the few free lunches in payroll.
The tips row. Restaurants: you owe the employer FICA match on reported tips, which is money you never touched, paid on income that came from a customer to a server. It is a real cost and it is easy to forget when pricing a menu.
Bonuses and commissions carry one wrinkle of their own. They are supplemental wages, and when you identify them separately from regular pay, IRS Publication 15 lets you withhold federal income tax at a flat 22 percent for 2026, rising to a mandatory 37 percent on supplemental wages above $1 million in a year. That changes the withholding, not the tax finally owed, and FICA applies exactly as it does to salary.
Part-time status and a termination change none of this. There is no part-time exemption from FICA, FUTA, or SUTA and no minimum number of hours, so someone who works four hours a week is taxed at every rate above, just on a smaller base. Final wages and severance are wages too: FICA applies, income tax is withheld, and the amounts go into your normal deposit for that period.
State Payroll Taxes, and Why Multi-State Is Painful
Everything above is federal. The state layer sits on top and it is where the administrative burden actually lives.
| What varies by state | Range | Note |
|---|---|---|
| State income tax withholding | Nine states have none at all | The rest vary in rate and in method |
| SUTA rate | From 0 percent to over 14 percent | Per the Department of Labor's January 2026 state law summary. Experience-rated, so your own claims history moves it |
| SUTA wage base | Varies enormously | Some states tax far more than the federal $7,000 |
| Employee SUTA contribution | A few states require one | Alaska, New Jersey, Pennsylvania |
| Disability and family leave taxes | Several states have them | New York and New Jersey, among others |
| Local income tax | Some cities | Ohio and Pennsylvania are notable for this |
| Registration | Required in every state you have an employee | Before you run payroll there. Not after |
Two things to take from that.
The law that applies is the law of the state where the employee works, not where you are incorporated. Hire one remote person across a state line and you have acquired a new set of registrations, rates, forms, and deadlines.
You must register before you run payroll there, not after. This catches employers who hire a remote person quickly and sort out the paperwork later, and discovering you were not registered is a different and worse conversation than doing it in the right order.
The local row in that table hides more than it shows. City income taxes are not confined to Ohio and Pennsylvania: Kansas City and St. Louis each levy a 1 percent earnings tax that you withhold from residents and from non-residents for work performed inside city limits, and St. Louis adds a 0.5 percent payroll expense tax paid by the employer rather than withheld from anyone.
Those city taxes go to the city, on the city's own forms and schedule, not to the state. A provider that files your state withholding flawlessly may not be touching them at all. If anyone works in a city with its own tax, ask that specific question rather than assuming state coverage includes it.
Contractors, and Why Misclassification Is Pursued So Hard
If a person is a 1099 contractor rather than a W-2 employee, your entire payroll tax obligation disappears.
| W-2 employee | 1099 contractor | |
|---|---|---|
| Income tax withholding | You calculate, withhold, remit | None |
| Social Security and Medicare | You match 7.65 percent | None. They pay both halves themselves |
| FUTA and SUTA | You pay both | None |
| Deposit schedule | Applies | Does not exist |
| Trust fund exposure | Yes | None. There is nothing withheld to hold in trust |
| Year-end form | Form W-2 | Form 1099-NEC |
| Your payroll tax cost | Roughly 8 to 15 percent above a $60,000 salary, set mostly by your state unemployment rate | Zero |
Read the last row and the enforcement posture explains itself. Calling someone a contractor rather than an employee saves you roughly 8 percent or more of what you pay them, immediately, plus the entire administrative apparatus above.
If You Pay Yourself
Founders ask this constantly and the answer turns entirely on structure.
| If you are | You pay | Note |
|---|---|---|
| A sole proprietor or partner | Self-employment tax: both halves of FICA, 15.3 percent | You are employer and employee at once. You pay both sides |
| An S corp owner taking a salary | Normal payroll taxes on the salary | The salary must be reasonable. This is heavily scrutinized |
| An S corp owner taking a distribution | No FICA on the distribution portion | Which is why the reasonable salary requirement exists at all |
| A C corp employee | Normal payroll taxes, like anyone else | You are an employee of your own company |
Per the IRS page on self-employment tax, the rate is 15.3 percent, which is exactly the combined employee and employer FICA, because that is precisely what it is. It is owed once net earnings reach $400, and you can deduct the employer-equivalent half when computing your income tax.
The S corp salary-versus-distribution question is a real planning area and a real audit risk. It is not something to decide from an article. Take advice.
Your First Employee: What Happens on Day One
The moment you hire your first person, a set of obligations switches on simultaneously, and most first-time employers discover them in the wrong order.
The step that catches people is the second one, and it catches them because of remote hiring. You register in the state where the employee works. If your business is in one state and your first hire is in another, you are registering somewhere unfamiliar, and you must do it before the first payroll runs there.
How to Actually Run This
The whole thing, in order, for a business that has just hired its first person.
Reconciling, and why you should do it in April
Once a quarter, three numbers should agree: what your payroll records say you owed, what your Form 941 reports, and what you actually deposited.
If they do not agree, something is wrong, and the cheapest possible moment to discover that is now, while the quarter is fresh and the person who ran it still remembers. The most expensive moment is during an examination, three years later, when the person has left and nobody can explain the discrepancy.
| Check | What should match | Why it matters |
|---|---|---|
| Wages | Your payroll register against Form 941 line 2 | If these differ, one of them is wrong and you need to know which |
| Withheld income tax | Payroll register against Form 941 | This is trust fund money. Errors here are the expensive kind |
| FICA, both shares | Register against Form 941 lines 5a to 5d | 12.4 percent of Social Security wages and 2.9 percent of Medicare wages, split evenly, plus any 0.9 percent Additional Medicare withheld |
| Deposits made | Your bank statements against the return | A return that reports more than you deposited is a penalty waiting to happen |
| Year to date | Q4 return against the W-2s you issue | January is when a year of small errors becomes one visible one |
Your provider does the arithmetic. You are checking that the arithmetic was done on the right numbers, which is a different thing, and it is the one part of this that nobody can do for you.
Common Mistakes
These recur, and the last one is in a different category from all the others.
The unifying error is treating the money in your payroll account as though it is all yours. Some of it is. Most of it is not.
The portion you withheld belongs to your employee and to the government. You are holding it in trust, for a few days, as a mechanical convenience. The entire structure of penalties around payroll tax exists because that distinction is easy to blur when cash is tight, and because the government has learned, over a very long time, exactly how tempting it is.
The fix is a decision you make now, while cash is comfortable: the deposit is never the money you reach for. Then confirm with your provider which deposit schedule you are on, and put both dates, payday and deposit day, in your cash forecast.
Frequently Asked Questions
What is payroll tax?
Payroll taxes are taxes on wages that fund specific social insurance programs: Social Security, Medicare, and unemployment insurance. They are flat-rate taxes, unlike income tax which is progressive, and they are shared between employer and employee. FICA covers Social Security and Medicare, with the employee paying 7.65 percent and the employer matching it. Social Security stops at an annual wage base, $184,500 for 2026, while Medicare runs on every dollar. FUTA and SUTA fund unemployment, and the employer bears nearly all of that cost. Federal income tax withholding travels on the same forms and deposits, yet every dollar of it comes from the employee.
Who pays payroll tax, the employer or the employee?
Both, and the split matters. For Social Security and Medicare, each side pays the same amount: 6.2 percent and 1.45 percent come out of the employee's wages, and the employer matches them dollar for dollar, which puts each side at 7.65 percent and the combined FICA rate at 15.3 percent. The unemployment taxes, FUTA and SUTA, fall almost entirely on the employer; only in Alaska, New Jersey, and Pennsylvania do workers also pay into SUTA. Federal and state income tax withholding is the employee's money from start to finish: the employer collects it and sends it on, but pays none of it.
How much is payroll tax?
The employee pays 7.65 percent of wages in FICA, comprising 6.2 percent Social Security up to an annual wage base and 1.45 percent Medicare on everything. The employer pays a matching 7.65 percent, plus FUTA at an effective 0.6 percent on the first $7,000 of each employee’s wages, plus state unemployment tax that varies enormously by state and by the employer’s own claims history. On a $60,000 salary, the employer’s total comes to about $4,600 to $9,100 a year, roughly 8 to 15 percent on top of the salary, and the state unemployment rate decides where in that range it lands. At the base new-employer rates most states set, it is about 8 to 10 percent.
What is the payroll tax rate?
Social Security is 6.2 percent from the employee and 6.2 percent from the employer, up to an annual wage base that adjusts each year and is $184,500 for 2026. Medicare is 1.45 percent from each side with no cap. An Additional Medicare Tax of 0.9 percent applies to employee wages above $200,000, with no employer match. FUTA is 6.0 percent statutory on the first $7,000, reduced to an effective 0.6 percent by the 5.4 percent state credit, though it is higher in a credit reduction state. SUTA rates vary by state and are experience-rated to your own layoff history, running from 0 percent to over 14 percent across the states per the Department of Labor’s January 2026 summary.
What payroll taxes do employers pay?
Four. The employer share of Social Security at 6.2 percent, up to the annual wage base. The employer share of Medicare at 1.45 percent, uncapped. FUTA, the federal unemployment tax, at an effective 0.6 percent on the first $7,000 of each employee’s wages. And SUTA, the state unemployment tax, which varies by state. Notably, employers pay no part of federal income tax withholding and no part of the Additional Medicare Tax, both of which they withhold and remit but never pay. The two unemployment taxes are the ones that move: FUTA rises in a credit reduction state, and SUTA is experience-rated, so your rate climbs with your own layoff history.
What is the employer portion of payroll taxes?
It is 7.65 percent of wages in FICA, matching the employee exactly, plus unemployment taxes that the employee generally does not pay at all. On a $60,000 salary, the FICA match alone runs to roughly $4,590, plus about $42 in FUTA and whatever your state charges in SUTA, which on that salary runs from nothing to about $4,500. Altogether that is roughly 8 to 15 percent on top of the salary. None of it appears on the employee’s pay stub, which means the true cost of employing someone is meaningfully higher than their gross pay and the employee has no way of knowing it.
How much do employers pay in payroll taxes?
For a $60,000 employee, roughly 8 to 15 percent on top of gross wages, before any benefit. That is $3,720 in employer Social Security, $870 in employer Medicare, $42 in FUTA, and anywhere from nothing to about $4,500 in state unemployment tax, depending on your state’s wage base and the rate it assigns you. At the base new-employer rates most states set, the total lands at about 8 to 10 percent; the top of the range belongs to employers with a heavy layoff history in a state with a high wage base. Budgeting a hire at their salary figure understates the true cost by roughly 8 percent or more, which catches out a lot of first-time employers.
How do payroll tax deposits work?
The IRS assigns your deposit schedule; you do not pick it. The assignment depends on the total tax you reported over a twelve-month lookback period, measured from July 1 of the second preceding year to June 30 of the prior year. A total of $50,000 or less makes you a monthly depositor, with each month’s tax due by the 15th of the next month. A total above $50,000 makes you a semiweekly depositor, with deposits due a few days after each payday. Separately, once the tax accumulated in any deposit period hits $100,000, the deposit is due the next business day and you become a semiweekly depositor automatically.
What happens if I deposit payroll taxes late?
An escalating failure-to-deposit penalty. Two percent if you are one to five days late, five percent at six to fifteen days, ten percent beyond fifteen days, and fifteen percent if you are more than ten days past an IRS notice. The tiers do not stack, so a deposit sixteen days late costs 10 percent rather than 2 plus 5 plus 10, and the days are calendar days counted from the due date. That is the business penalty. Far more seriously, the withheld portion of payroll tax is a trust fund tax, and failing to remit it can make a responsible person personally liable for the full amount, regardless of the corporate structure.
What is the Trust Fund Recovery Penalty?
It is the IRS mechanism for collecting unpaid withheld taxes from a person rather than from a company. If you are a responsible person and you willfully fail to pay over the trust fund taxes, you can be held personally liable for a penalty equal to 100 percent of the unpaid amount, plus interest. It covers the withheld income tax and the employee share of FICA, but not the employer share. It is not dischargeable in bankruptcy, and it can reach a bookkeeper or office manager as well as an owner. Willfulness requires no evil intent: using the available money to pay other creditors points to it, and paying net wages when the withholding cannot also be covered is treated as a willful failure.
What if I cannot afford both payroll and the tax deposit?
Get advice immediately, because the intuitive answer is the dangerous one. The IRS takes the position that handing employees their net pay when there is not enough money left to cover the withholding taxes is a willful failure, and that a responsible person has a duty to divide whatever money there is proportionally between the employees and the government. An employee waiting on wages counts as just another creditor in that analysis, which means putting staff ahead of the government is itself treated as evidence of willfulness. The choice that feels compassionate is exactly the one that makes the liability personal.
What forms do I file for payroll taxes?
The core federal set is Form 941 each quarter, reporting federal income tax withheld and both shares of Social Security and Medicare, due by the last day of the month after the quarter ends. Form 940 annually for FUTA, due January 31. Form W-2 to each employee and the Social Security Administration by January 31. Some very small employers file Form 944 annually instead of 941, but only if the IRS has notified them to. Semiweekly depositors also file Schedule B with each 941, reporting liability by the day wages were paid. And state returns, which vary. Your payroll provider will usually file these for you, but the IRS still holds you generally responsible, so confirm each one went in.
Do I pay payroll taxes on contractors?
No, and that saving is precisely why misclassification is pursued so aggressively. You withhold no income tax, pay no FICA match, owe no FUTA or SUTA, and issue a Form 1099-NEC rather than a W-2. There is no deposit schedule and no trust fund exposure, because nothing is withheld. The contractor pays self-employment tax covering both halves of FICA themselves, 15.3 percent. Treating an employee as a contractor saves you roughly 8 percent or more of what you pay them, immediately, which is exactly the motive the classification tests are designed to detect, and the penalties for getting it wrong include back taxes, interest, and penalties. Those tests look at the working relationship, not at what your contract calls it.
Do payroll taxes apply to bonuses and commissions?
Yes. Bonuses, commissions, overtime, severance, and tips are all wages, and FICA applies to them exactly as it applies to salary. What differs is the federal income tax withholding: these are supplemental wages, and when you identify them separately from regular pay, IRS Publication 15 allows an optional flat rate of 22 percent for 2026 in place of the normal tables, rising to a mandatory 37 percent on supplemental wages above $1 million in a year. That affects how much is withheld, not how much tax is ultimately owed, and it does not change the FICA treatment at all. Watch the deposit side too: a bonus run that pushes the tax accumulated in a deposit period to $100,000 makes the deposit due the next business day and turns you into a semiweekly depositor through the end of the following year.
What are ER taxes on a payroll report?
ER is the shorthand for employer, and EE is the shorthand for employee. So the ER taxes column on a payroll register or pay stub is your share: 6.2 percent Social Security, 1.45 percent Medicare, FUTA, and SUTA. The EE column is what was withheld from the person’s pay and is being remitted on their behalf. The distinction is worth knowing because the two columns behave completely differently in your accounts. ER is a cost that reduces your profit. EE is money you are holding in trust and passing on, and it was never yours. These are reporting conventions rather than statutory terms, and providers label the same two columns in different ways.
How do I calculate payroll taxes for one paycheck?
Take the gross wages for the run, adjust the base for pre-tax deductions, then apply the flat rates twice. On a $3,000 paycheck with no pre-tax deductions, the employee pays $186 in Social Security and $43.50 in Medicare, and you owe exactly the same amounts again out of business funds. Add FUTA at 0.6 percent while year-to-date wages are under $7,000, and SUTA at whatever rate your state assigned you. At an illustrative 2.5 percent state rate, your cost above the $3,000 comes to $322.50, about 10.75 percent. Federal income tax withholding is the one line that is not a percentage: it comes from the employee’s Form W-4 and the tables in IRS Publication 15-T.
What is the payroll tax wage base?
It is the annual limit on wages subject to Social Security tax. Once an employee’s year-to-date wages cross it, Social Security stops being withheld for the rest of the year, and your matching contribution stops too. Per IRS Topic 751 the base is $184,500 for 2026, and it adjusts upward most years. Medicare has no wage base at all and continues on every dollar. This is why a well-paid employee’s net pay rises in the autumn and why your own payroll tax cost for that person falls at the same moment. FUTA runs on a much smaller base of its own, the first $7,000 of each employee’s wages, and each state sets its own SUTA wage base.
How do payroll taxes work?
Every payday, you calculate the tax on the wages, withhold the employee’s portion from their pay, add your own employer portion out of business funds, and deposit the combined amount with the IRS on a schedule the IRS assigned you. Then, quarterly, you file a return summarizing what you deposited, usually Form 941. The withholding and the depositing are continuous; the filing is periodic. Missing a deposit is penalized even if the return is perfect, because the penalties attach to the money, not to the paperwork. The year then closes with Form 940 for FUTA and a Form W-2 for every employee, both due by January 31.
What is the difference between payroll tax and income tax?
Payroll taxes are flat-rate, fund specific programs like Social Security and Medicare, and are shared between employer and employee. Income tax is progressive, funds general government spending, and is paid entirely by the employee. From your side as an employer, the practical difference is that you pay part of the payroll tax out of your own money and you pay none of the income tax. You withhold income tax and remit it, but not a dollar of it is your cost. The amounts are worked out differently too: FICA is a flat 7.65 percent on each side, while income tax withholding comes from the employee’s Form W-4 and the tables in IRS Publication 15-T, so two people on identical salaries can have very different withholding.
Are payroll taxes deposited with every paycheck?
Not necessarily, and this is where employers get confused. The tax liability arises with every paycheck, but the deposit is due on a schedule, either monthly or semiweekly, and neither of them is every payday. A monthly depositor accumulates the liability from all the paydays in a month and deposits it by the 15th of the following month. A semiweekly depositor deposits within a few days of each payday: a Wednesday, Thursday, or Friday payday by the following Wednesday, and a Saturday through Tuesday payday by the following Friday. Your provider handles the timing; you should know which schedule you are on.
What is a lookback period?
It is the twelve months running from July 1 of the second preceding year to June 30 of the prior year, and it is how the IRS decides your deposit schedule for the coming year. If your total reported tax liability during that window was $50,000 or less, you are a monthly depositor. If it was more, you are semiweekly. The catch is the delay: this year’s schedule reflects a window that opened eighteen months before the year began and closed six months before it, so a business that has grown can be switched to semiweekly without anyone there realizing it and may still be depositing on its old monthly rhythm. A new employer has no lookback history, so its liability is treated as zero and it starts as a monthly depositor.
Do I owe payroll tax on a 401(k) contribution?
Yes, and this catches almost everybody. When an employee defers pay into a traditional 401(k), the deferral lowers the wages used for income tax withholding, so less income tax comes out of the check. Social Security and Medicare ignore it: FICA is still calculated on the full gross, deferral included, so you still owe your match on the deferred dollars. The W-2 shows the split every January: Box 1 carries income tax wages after the deferral, while Boxes 3 and 5, the Social Security and Medicare wages, still include it. Health premiums paid through a Section 125 cafeteria plan work the other way, because they do come off FICA wages, which saves both the employee and you.
Do I owe payroll tax on tips?
Yes. Tips reported by an employee are wages for FICA purposes, which means the employee pays Social Security and Medicare on them and you owe your matching employer share. That is money you never handled, going from a customer to a server, on which you nonetheless owe 7.65 percent. Reported tips count as wages for payroll tax just as salary, overtime, and commissions do, so they go into the base your Social Security and Medicare rates are applied to, and your match grows with every tipped dollar an employee reports. It is a real cost for any tipped business and it is easy to leave out when pricing a menu.
What is EFTPS?
The Electronic Federal Tax Payment System, a free Treasury service for making federal tax deposits, which the IRS requires to be made by electronic funds transfer. It is one of the accepted routes for those deposits, alongside IRS Direct Pay and the IRS business tax account. Your payroll provider almost certainly uses it on your behalf, and you should confirm they do. The important thing to know is not the mechanics but the timing: the deposit leaves your account on a schedule that is separate from when your employees are paid, and knowing which day your bank balance has to be right is the difference between a smooth month and a penalty.
Can I be personally liable for my company's payroll taxes?
For the withheld portion, yes, and the corporate structure does not protect you. The Trust Fund Recovery Penalty allows the IRS to assess a penalty equal to 100 percent of the unpaid trust fund taxes against any responsible person who willfully failed to remit them. That means the withheld income tax and the employee share of FICA, not the employer share. Responsible person is defined by actual authority over the money rather than by job title, and it can include a bookkeeper. Willfulness includes paying other business expenses instead of the tax. More than one person can be held responsible for the same quarter, and the IRS can pursue each of them for the full amount, although it collects the tax only once. And the liability is not dischargeable in bankruptcy.
What should I do if I am about to miss a payroll tax deposit?
Get an accountant or a tax attorney on the phone that same day, before you decide anything. The obvious move, paying your staff now and catching up on the tax next month, is exactly what the IRS treats as willful, and it is what turns a company problem into a personal liability. You do have options: splitting the available money proportionally, negotiating payment terms, and other ways through a bad month that stop short of a lien on your home. The one option that does not exist is quietly skipping the deposit and having it work out. And a deposit made one to five days late draws the 2 percent tier, where one left unpaid past fifteen days draws 10 percent.
What are employment taxes?
It is the IRS umbrella term for the federal taxes covered in this article: federal income tax withholding, Social Security and Medicare taxes under FICA, and federal unemployment tax under FUTA. In everyday use, employment taxes and payroll taxes mean the same thing, though a purist would note that income tax withholding is administered alongside the payroll taxes without technically being one. The distinction does not matter operationally, because withholding and FICA are deposited together and reported on the same Form 941. FUTA has its own annual return, Form 940, and state unemployment tax sits outside the IRS term altogether, though in everyday use it counts as a payroll tax.
How much is employment tax for a small business?
As an employer, expect to pay roughly 8 to 15 percent above gross wages on a $60,000 salary, or about 8 to 10 percent at the base new-employer rates most states set. Most of that is your FICA match, 6.2 percent for Social Security and 1.45 percent for Medicare, equal to what each employee pays. On top come FUTA at about $42 per employee per year and state unemployment tax, charged only up to your state’s wage base at a rate that ranges from 0 percent to over 14 percent depending on your state and your own claims history. On a ten-person payroll of $600,000, the FICA match and FUTA come to $46,320 a year, and state unemployment tax adds anywhere from nothing to about $4,500 per person, so roughly $46,000 to $91,000 a year in employer payroll tax alone.
Do payroll taxes apply to part-time employees?
Yes, in full. There is no part-time exemption from FICA, FUTA, or SUTA, and no minimum hours threshold below which payroll taxes stop applying. A person who works four hours a week is an employee, their wages are wages, and every rate in this article applies to them exactly as it does to a full-time person. The only thing that changes is the amount, because the base is smaller. Because FUTA applies to the first $7,000 of each employee’s wages, a part-timer who earns less than that in a year carries FUTA on every dollar they earn. And they need a Form W-4 and a Form I-9 like anyone else.
What is Schedule B and do I need it?
Schedule B is an attachment to Form 941 that breaks your quarter’s tax liability down payday by payday, showing when each liability arose rather than when you paid it. You need it if you deposit on the semiweekly schedule, and that includes a monthly depositor whom the $100,000 next-day rule has just converted to it. If it is missing or filled in wrong, the IRS can spread your liability evenly over the quarter, compare each deposit against that averaged figure, and penalize the ones that fall short. The result is that deposits you made perfectly on time can still draw failure-to-deposit penalties.
Can I handle payroll taxes myself without a provider?
Legally yes, practically no, and this is one question where the answer is not nuanced. Rates and wage bases are updated every year, the IRS assigns your deposit schedule rather than letting you pick it, each new state you hire in brings its own registrations and filings, and mistakes are punished with anything from a percentage penalty that grows with time to personal liability that bankruptcy will not clear. A payroll provider costs little, and what can go wrong without one is out of all proportion to the money you would save. Even with one, the responsibility stays with you: the IRS holds you generally responsible when someone else handles your taxes, so know which returns the provider files and confirm that each deposit went through.
What happens to payroll taxes when an employee is terminated?
Nothing changes about the tax treatment. Final wages are wages: FICA applies, income tax is withheld, and the amounts go into your normal deposit for that period. Severance is also wages and is fully subject to FICA. What does change is the timing, because several states require final pay considerably faster than your normal cycle, and a payment made outside the usual run still carries its own deposit obligation on the schedule you are on. The departing employee still gets a Form W-2 for the year by January 31, and their final wages are reported on that quarter’s Form 941 like any other wages.
Is there a payroll tax for very small employers?
The taxes apply from your first employee, with no small-business exemption. There is one genuine relief, though: when your tax liability for the current quarter or the preceding quarter is under $2,500, and you did not incur a $100,000 next-day deposit obligation during the quarter, you can skip the deposits and pay the current quarter with a timely filed Form 941 instead. For the smallest employers, that removes a whole layer of deadlines. The catch is the word timely: file the return late and the relief disappears, so treat it as a simplification, never as extra time. Separately, some very small employers file Form 944 once a year instead of Form 941, but only if the IRS has notified them to.
Can a payroll tax penalty be removed?
Often, yes, and employers routinely fail to ask. The IRS has an administrative waiver, First Time Abate, that can wipe out a failure-to-deposit penalty if your record is clean: the same type of return filed on time for each of the three prior years, with no penalties assessed in that window. No hardship story is required, only the history, and a phone call can be enough to request it. Starting summer 2026, the IRS is replacing that waiver with an Automatic Exemption from Penalty for 2025 annual returns and 2026 quarterly returns onward, so the relief arrives without you asking for it, which is a meaningful improvement.
What counts as reasonable cause for a payroll tax penalty?
The IRS may accept reasons such as serious illness or death; fire, natural disaster, or civil disturbance; inability to obtain records; an unavoidable absence; and system problems that held up an electronic filing or payment. Erroneous written advice from the IRS is handled separately, as a statutory exception. The reasons that fail matter more. Lack of funds, by itself, is explicitly not reasonable cause, even though a cash shortfall is exactly why most employers miss a deposit. Relying on your accountant generally fails too, because the IRS still holds you responsible when someone else does the work. Whatever the reason, Publication 15 lifts the deposit penalties only where the failure was due to reasonable cause and not to willful neglect.
My accountant missed a deposit. Am I still liable?
Yes. The IRS is explicit that reliance on a tax professional does not generally excuse a failure to file or deposit on time. In its view, you generally remain responsible even when an accountant, bookkeeper, or payroll provider does the actual work. In practice, that means knowing which returns your provider files for you and getting confirmation that each deposit went through on its due date. Handing off the work never hands off the responsibility, so check before you assume the deposits are covered. If it was your first penalty in years, First Time Abate, or for 2026 quarterly returns onward the Automatic Exemption from Penalty, may still remove it, because both turn on your compliance record rather than on an excuse.
How do I correct an error on Form 941?
With Form 941-X, the adjusted employer’s quarterly federal tax return. Employers use it routinely, and an error you catch and fix is an administrative matter, not a disaster. Speed is what decides the cost. If you underreported employment tax, file Form 941-X by the due date of the return for the quarter in which you spotted the mistake and pay the balance when you file, and the correction is generally interest-free. File later and that interest-free treatment is lost. The costly move is never the mistake itself; it is leaving it alone once you know. Use a separate Form 941-X for each quarter you are correcting, and file it on its own rather than with your next Form 941.
What should I do if I get an IRS notice about payroll taxes?
Act on it, because ignoring a notice is both the most common reaction and the costliest one. Start by working out exactly what it concerns: the form, the tax period, and the notice number. Then check its deadline, since tax still unpaid more than ten days after an IRS notice moves the failure-to-deposit penalty up to its 15 percent tier. Next, get any missing returns filed, because each one runs up its own failure-to-file penalty and leaves a gap in the filing record that penalty relief looks at. After that, request abatement. If the problem is withheld tax that was never paid over, not just paid late, bring in a professional at once, because that is a different order of problem.