Payroll Taxes: What You Owe, When You Owe It

Payroll Taxes: What You Owe, When You Owe It

Hiring employees comes with payroll tax obligations. Miss a deposit deadline or file the wrong form, and the IRS penalties add up fast. This guide covers every payroll tax you need to handle, how to calculate them, and when to pay.

The Payroll Taxes You Owe

Federal Income Tax Withholding

You must withhold federal income tax from each employee's wages based on their Form W-4. The amount depends on their filing status, number of allowances or adjustments, and any additional withholding they request.

Use IRS Publication 15-T (Federal Income Tax Withholding Methods) or payroll software to determine the correct withholding amount for each pay period.

FICA Taxes (Social Security and Medicare)

FICA is split equally between employer and employee:

| Tax | Employee Share | Employer Share | Wage Base | |---|---|---|---| | Social Security | 6.2% | 6.2% | Annual wage base (adjusts yearly) | | Medicare | 1.45% | 1.45% | No limit | | Additional Medicare | 0.9% | None | Over $200,000 |

You withhold the employee's share from their pay and pay the employer's share out of your own funds. The Additional Medicare Tax of 0.9% applies only to employee wages exceeding $200,000 -- there is no employer match for this.

Federal Unemployment Tax (FUTA)

FUTA is an employer-only tax. The rate is 6.0% on the first $7,000 of each employee's annual wages. However, you receive a credit of up to 5.4% for state unemployment taxes paid on time, reducing the effective FUTA rate to 0.6%.

Annual FUTA cost per employee: $7,000 x 0.6% = $42 (assuming full state credit).

Deposit Schedules

The IRS assigns you a deposit schedule based on your total tax liability during a lookback period (the 12-month period ending June 30 of the prior year):

Monthly Depositor

If you reported $50,000 or less in total employment taxes during the lookback period, you deposit monthly. Taxes accumulated during a month are due by the 15th of the following month.

Semi-Weekly Depositor

If you reported more than $50,000 in employment taxes during the lookback period, you deposit semi-weekly:

• Wages paid Wednesday through Friday: deposit by the following Wednesday
• Wages paid Saturday through Tuesday: deposit by the following Friday

Next-Day Deposit Rule

If you accumulate $100,000 or more in employment taxes on any day during a deposit period, you must deposit by the next business day. This also moves you to a semi-weekly schedule for the remainder of the calendar year and the following year.

How to Make Deposits

All federal payroll tax deposits must be made electronically using the Electronic Federal Tax Payment System (EFTPS). You cannot mail a check for payroll tax deposits. Enroll at eftps.gov if you have not already.

Filing Requirements

Form 941 (Quarterly)

File Form 941 each quarter to report:

• Total wages paid
• Federal income tax withheld
• Social Security and Medicare taxes (employee and employer shares)
• Deposits made during the quarter

Due dates: April 30, July 31, October 31, January 31

If you deposited all taxes on time and in full, you get an extra 10 days to file.

Form 940 (Annual)

File Form 940 annually to report FUTA tax. Due January 31 for the previous year. If your total FUTA tax exceeds $500 for the year, you must make quarterly deposits.

Form W-2 (Annual)

Issue Form W-2 to each employee by January 31, reporting their total wages and tax withholdings for the prior year. File Copy A with the Social Security Administration.

Form W-3 (Annual)

File Form W-3 as a transmittal form with all W-2s sent to the Social Security Administration. Due January 31.

Penalties for Non-Compliance

Payroll tax penalties are among the harshest in the tax code:

• Late deposit penalty: 2% (1-5 days late), 5% (6-15 days late), 10% (16+ days late), 15% (if not deposited within 10 days of IRS notice)
• Late filing penalty: 5% of unpaid tax per month, up to 25%
• Trust fund recovery penalty: If you willfully fail to withhold and deposit employment taxes, the IRS can assess a penalty equal to 100% of the unpaid taxes against you personally -- even if your business is an LLC or corporation

The trust fund recovery penalty is personal. It pierces the corporate veil and holds responsible individuals liable. This includes business owners, officers, and anyone else with authority over financial decisions.

Payroll Setup Checklist

1. Obtain an Employer Identification Number (EIN) from the IRS
2. Register for EFTPS at eftps.gov
3. Collect Form W-4 from each employee
4. Collect Form I-9 (Employment Eligibility Verification)
5. Register with your state for income tax withholding and unemployment insurance
6. Set up a payroll system (software or service provider)
7. Determine your deposit schedule
8. Calendar all filing deadlines

Should You Use a Payroll Service?

For most small businesses, the answer is yes. Payroll services handle calculations, deposits, and filings for a relatively small fee. The cost of a payroll mistake -- penalties, interest, and personal liability -- far exceeds the cost of outsourcing. If you have even one employee, invest in a payroll solution that handles federal and state tax compliance automatically.