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. The rates are the easy part. Your payroll provider knows them, applies them automatically, and you will never think about them again.
What will hurt you is the deposits. Not the rates, not the forms, not the arithmetic. The money, and when it has to leave your account, and what happens when it does not.
Because 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. Your team has rent to pay. The IRS is an institution. So you pay your people, and you intend to catch up next month, 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. And the penalty for getting it wrong is personal, reaches you after the company is gone, and is not dischargeable in bankruptcy.
So this guide covers all of it, at length, for a US business with five to fifty people. Every rate, who pays what, what a hire actually costs, the deposit schedules, the penalties, the forms, the state layer, and the things that pierce your LLC. FirstHR is not a payroll processor and does not calculate or deposit your taxes; a provider does that and you should use one. This is general information rather than tax advice, rates change annually, and this is one of the few areas where the cost of being wrong is genuinely unbounded.
What Payroll Tax Is
Taxes 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. It is one of the few genuinely predictable parts of small business HR.
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
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 | A handful of states require an employee contribution |
| State income tax | Everything | Nothing | Same as federal. You withhold and remit |
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. Whether a given worker is exempt or nonexempt does not change any of this, which is a separate question covered in the exempt versus non-exempt guide.
That distinction, between what you pay and what you merely handle, is developed at length in the guide to payroll tax versus income tax. It also turns out to be the thing that makes the trust fund penalty so dangerous, for reasons that become clear later.
Every Rate, in One Table
The complete picture. Verify the current figures each year; the structure holds, the numbers move.
| 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 is a figure that will 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. And SUTA is the only employment tax whose rate is specific to you rather than set by statute. Both show up as lines on the pay stub, where your employee will notice them and ask.
FICA in Detail
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, 15.3 percent of every dollar of wages goes to FICA.
The wage base, and the autumn surprise
Social Security stops at the annual wage base. Once an employee's year-to-date wages cross it, the deduction vanishes from their stub and their net pay jumps.
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 favour. 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 modelling rather than discovering, alongside the rest of what a person costs you in the guide to how much benefits cost per employee.
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
Nothing is withheld from the employee, in almost every state. The whole thing 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 |
| Reported on | Form 940, annually | Due January 31 |
Forty-two dollars a year per employee. Trivial, and the reason to know about it is the exception.
SUTA
State unemployment tax, and it 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.
Which produces a fact worth internalizing: firing people is more expensive than it looks, and the extra cost is spread invisibly across your SUTA rate for years afterwards. It is the only tax in this entire article that responds to how you actually run the business, and it belongs alongside the other costs of a departure, including any PTO payout you owe.
SUTA is also the one place employees sometimes contribute. In most states they do not, but in a small number, including Alaska, New Jersey, and Pennsylvania, employees pay a share of state unemployment tax as well.
What Payroll Tax Actually Costs You
Here is where the rates become a number you can put in a budget.
Roughly 8 to 11 percent above salary, in payroll tax alone. Before benefits. Before workers compensation. Before equipment.
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.
Deposits and Deadlines: The Part That Actually Matters
Everything above was arithmetic your provider does automatically. This is the part that can hurt you, and it is the part almost no guide covers 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 afterwards. 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, being the twelve months ending the previous June 30. Report $50,000 or less and you are monthly. More and you are semiweekly.
Read that carefully, because it has a consequence people miss. Your schedule this year was set by what you did eighteen months ago. 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
A point 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.
Which means if you change your pay schedule, 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. The mechanics are covered in the arrears guide, and the practical consequences for your bank balance in the pay schedule guide.
How the money actually moves
Federal tax deposits are made electronically, through the Electronic Federal Tax Payment System. Your payroll provider almost certainly does this for you, and you should confirm that they do, and confirm which schedule they think you are on, and confirm it again if your business grows meaningfully. Note that the debit hits your account before the money reaches employees, which interacts with the timing covered in the direct deposit guide.
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. Which means 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. Fifteen percent applies when you are more than ten days past an IRS 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
Now the section that 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 the employee's money in trust for the government. It was never yours, not for a moment, and the IRS treats it as government property from the instant it is withheld from the paycheck.
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. It is the settled position, reflected in the IRS Internal Revenue Manual 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; 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
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. That includes the person you hired to handle the money precisely so that you would not have to, which is worth saying out loud to them before they find out from a letter. It is one of the sharper edges in HR compliance.
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
The section above was about what happens when you get it wrong. This one is about how to never be in that position, and it is entirely a cash flow problem.
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 $21,500 | Not $20,000. And not all on the same day |
Illustrative, and the shape is what matters. Your $20,000 payroll is a $21,500 cash outflow, and the components leave on different days.
Which produces 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.
If You Are Already Behind
Everything so far has been about doing it right. But a great many people find an article like this because they have already got it wrong, and nobody writes that section, so here it is.
You have more options than you think, and the worst thing you can do is nothing.
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.
Read that again if you have just been penalized for a single late deposit and you have otherwise been careful for years. There is a very good chance that 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.
| Reason | Generally accepted? | Note |
|---|---|---|
| Serious illness or death, of you or immediate family | Yes | With documentation. Dates matter |
| Fire, natural disaster, or destruction of records | Yes | This is the paradigm case |
| Unavoidable absence | Yes | If genuinely unavoidable and documented |
| Erroneous written advice from the IRS | Yes | But it has to be in writing |
| Inability to obtain records despite ordinary care | Sometimes | You have to show the ordinary care |
| You did not have the money | No | Lack of funds is explicitly not reasonable cause |
| Your accountant was supposed to do it | No | Reliance on a tax professional does not excuse you |
| You did not know | No | Lack of knowledge is not a defense |
The two rows at the bottom are the ones that matter, because they are the two things every employer in trouble actually says.
Lack of funds is not reasonable cause. That is stated explicitly, and it is worth sitting with, 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 not reasonable cause. You are responsible for complying with tax law even when somebody else handles your taxes. You should know what your provider files, and get proof that the deposit was made 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. Underpayments of employment tax can generally be corrected without interest if the amount is paid by the time the adjusted return is filed. Wait, and interest begins accruing from that point. 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 of them carry the whole thing, 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. Keep the filings with your other records, to the standards in the guide on how long to keep employee records.
The one exception to depositing
If your total tax liability for a quarter is less than $2,500, you may generally pay it with your timely filed return rather than making deposits. That is a genuine relief for the smallest employers, and it is the only circumstance in which the deposit rules relax.
Note the word timely. The exception depends on the return being filed on time. It is not a licence to be late.
What Counts as Wages for Payroll Tax
A question that sounds trivial and is not, because the answer determines the base every rate is applied to.
| 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.
The wider question of what belongs in the wage base at all is covered in the gross pay guide.
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 under 1 percent to over 6 percent | Experience-rated. 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. It is the same trap that catches employers with pay transparency laws: the obligation attaches to where the work happens.
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 | 8 to 11 percent above wages | Zero |
Read the last row and the enforcement posture explains itself. Calling someone a contractor rather than an employee saves you around a tenth 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 |
The self-employment tax rate is 15.3 percent, which is exactly the combined employee and employer FICA, because that is precisely what it is. You can deduct the employer-equivalent half when computing your income tax, which softens it without removing it. Setting your own pay schedule is a separate decision from setting your own salary, and both matter.
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.
The full onboarding sequence, including the forms, is in the new hire paperwork guide and the new hire reporting guide.
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 the return | Should be exactly 15.3 percent of FICA wages, split evenly |
| 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 rest of the recurring small-employer errors are collected in the HR processes guide.
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. FUTA and SUTA fund unemployment and are paid almost entirely by the employer. Federal income tax withholding is administered on the same forms and deposits, but it is paid entirely by the employee.
Who pays payroll tax, the employer or the employee?
Both, and the split matters. The employee pays 6.2 percent Social Security and 1.45 percent Medicare, and the employer matches both, so each side pays 7.65 percent and the combined FICA rate is 15.3 percent. Unemployment taxes, FUTA and SUTA, are paid almost entirely by the employer, with a handful of states requiring an employee contribution to SUTA. Federal and state income tax withholding comes entirely out of the employee's pay: the employer collects and remits it 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. For an employer, the total payroll tax cost is typically 8 to 11 percent on top of the salary.
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. 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 state credit. SUTA rates vary by state and are experience-rated to your own layoff history.
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.
What is the employer portion of payroll taxes?
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. 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?
Roughly 8 to 11 percent on top of gross wages, before any benefit. On a $60,000 employee, that is about $3,720 in employer Social Security, $870 in employer Medicare, $42 in FUTA, and anywhere from a few hundred to a couple of thousand in state unemployment tax depending on your state and your claims history. Budgeting a hire at their salary figure understates the cost by at least a tenth, which is the single most common surprise for a first-time employer.
How do payroll tax deposits work?
You do not choose your deposit schedule; it is assigned based on your total tax liability during a lookback period, being the twelve months ending the previous June 30. If you reported $50,000 or less, you are a monthly depositor and deposit by the 15th of the following month. Above $50,000 and you are semiweekly, depositing within a few days of each payday. And if you ever accumulate $100,000 of liability on a single day, you must deposit by the next business day and you are automatically moved to semiweekly.
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. 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.
What if I cannot afford both payroll and the tax deposit?
Get advice immediately, because the intuitive answer is the dangerous one. The IRS position is that paying net wages when funds are not available for the withholding taxes is a willful failure, and that a responsible person has a duty to prorate the available funds between the government and the employees. For this purpose an employee owed wages is treated as just another creditor, so preferring them over the government is itself evidence of willfulness. The compassionate choice is the one that creates personal liability.
What forms do I file for payroll taxes?
Form 941 quarterly, reporting federal income tax withheld and both shares of Social Security and Medicare. Form 940 annually for FUTA. 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.
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. The contractor pays self-employment tax covering both halves of FICA themselves. Treating an employee as a contractor saves you eight to eleven percent 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.
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 the IRS permits a flat withholding rate rather than the normal tables. That affects how much is withheld, not how much tax is ultimately owed, and it does not change the FICA treatment at all.
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. 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.
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. 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.
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.
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. Your provider handles the timing; you should know which schedule you are on.
What is a lookback period?
The twelve months ending the previous June 30, 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 consequence people miss is that your schedule this year was set by what you did eighteen months ago, so a business that has grown may have been moved to semiweekly without noticing and may still be depositing on the old rhythm.
Do I owe payroll tax on a 401(k) contribution?
Yes, and this catches almost everybody. A traditional 401(k) contribution reduces the employee's taxable income for income tax purposes, so their income tax withholding drops. It does not reduce the wages subject to Social Security and Medicare. FICA is calculated on the full gross, before the retirement deduction. Health premiums under a Section 125 cafeteria plan behave differently and genuinely do reduce 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. 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, which is how federal tax deposits are actually made. 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. 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. And the liability is not dischargeable in bankruptcy.
What should I do if I am about to miss a payroll tax deposit?
Call an accountant or a tax attorney the same day, before you decide anything. The intuitive move, paying your staff and catching up on the tax next month, is the one that the IRS treats as willful and that creates personal liability. There are options, including prorating the available funds and arranging payment terms, and there are ways of handling a bad month that do not end with a lien against your home. What there is not, is a version where you quietly skip the deposit and it turns out fine.
What are employment taxes?
It is the IRS umbrella term for everything 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 they are deposited together and reported on the same return.
How much is employment tax for a small business?
As an employer, expect to pay roughly 8 to 11 percent above gross wages. That comprises 6.2 percent Social Security and 1.45 percent Medicare, both matching what the employee paid, plus about $42 per employee per year in FUTA, plus state unemployment tax that varies from under one percent to several percent depending on your state and your own claims history. On a ten-person payroll of $600,000, that is roughly $50,000 to $65,000 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.
What is Schedule B and do I need it?
Schedule B accompanies Form 941 and reports your tax liability by the day the wages were paid, rather than by the day you deposited. You need it if you are a semiweekly depositor. Skipping it or completing it incorrectly gives the IRS grounds to average your liability across the quarter and then assess failure-to-deposit penalties on every deposit that does not match the average. Which means you can be penalized for deposits that were, in fact, entirely correct.
Can I handle payroll taxes myself without a provider?
Legally yes, practically no, and this is the one piece of advice in this area that is not nuanced. The rates change annually, the deposit schedules are assigned rather than chosen, the state layer multiplies with every state you hire in, and the penalty for getting it wrong ranges from an escalating percentage to personal liability that survives bankruptcy. The cost of a payroll provider is small and the failure modes of not having one are not proportionate to the saving.
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.
Is there a payroll tax for very small employers?
The taxes apply from your first employee, with no small-business exemption. But there is one genuine relief: if your total tax liability for a quarter is less than $2,500, you may generally pay it with your timely filed Form 941 rather than making deposits during the quarter. That is a real simplification for the smallest employers, and it depends on the return being filed on time. It is not a licence to be late.
Can a payroll tax penalty be removed?
Often, yes, and employers routinely fail to ask. The IRS operates an administrative waiver that removes failure-to-deposit penalties for taxpayers with a clean compliance history, meaning the same return type was timely filed for the prior three years with no penalties assessed. You do not need an excuse; you need a clean record. The process can be as simple as a phone call. This relief is being replaced by an automatic version that applies without you having to request it, which is a meaningful improvement.
What counts as reasonable cause for a payroll tax penalty?
Serious illness or death, fire or natural disaster, destruction of records, unavoidable absence, and erroneous written advice from the IRS. What does not count is more important: lack of funds is explicitly not reasonable cause, which is awkward because it describes the situation most employers who miss a deposit are actually in. And relying on your accountant is not reasonable cause either. You remain responsible for compliance even when somebody else handles the work.
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. You are responsible for complying with tax law even if someone else handles your taxes, which means you should know what your provider files and obtain proof that deposits were made when they were supposed to be. Delegating the task does not delegate the liability, and this is worth understanding before you assume it is handled.
How do I correct an error on Form 941?
With Form 941-X, the adjusted employer's quarterly federal tax return. It is a routine mechanism and discovering an error is not a catastrophe if you act on it. The timing matters: an underpayment of employment tax can generally be corrected without interest if the amount is paid by the time the adjusted return is filed. Wait, and interest starts running from that point. Finding the error is not the expensive part. Sitting on it is.
What should I do if I get an IRS notice about payroll taxes?
Not put it in a drawer, which is the most common and most expensive response. Read it, identify the form, period, and notice number, and note the deadline, because the failure-to-deposit penalty jumps to 15 percent once you are more than ten days past a notice. File anything unfiled first, because relief is generally denied while returns are missing. Then ask about abatement. And if unremitted withheld tax is involved rather than merely late tax, stop and call a professional, because that is a different order of problem.