Payroll taxes for small businesses: what you withhold, what you pay, and when it's due

Payroll taxes are the part of having employees that new employers most often underestimate. It isn't only that the employee's paycheck has tax taken out. You also pay tax on top of their wages, deposit everything on a schedule the IRS sets, and file returns every quarter and every year. Get it wrong, and the penalties are steep, and in some cases personal.

The good news is that the rules are stable and well defined, and payroll software applies them for you. This guide explains what's happening on every paycheck so you can check it, budget for it and avoid the costly mistakes.

Two kinds of payroll tax

Every payroll involves two separate piles of tax, and it helps to keep them apart in your head.

Taxes you withhold from the employee. These come out of the employee's gross pay. You're holding the money for the government, and you must pass it on.

Taxes you pay as the employer. These come out of your business, on top of the wages. They're a cost of employing someone.

What you withhold from the employee

• Federal income tax, worked out from the employee's Form W-4 using the IRS withholding tables. The amount depends on their pay, filing status and the adjustments they claim.
• Social Security tax at 6.2% of wages, up to a wage base of $184,500 in 2026. Once an employee's wages for the year pass that, Social Security withholding stops.
• Medicare tax at 1.45% of all wages, with no wage base.
• Additional Medicare tax of 0.9% on wages over $200,000 in a calendar year, withheld from the employee only. There's no employer match.
• State and local income tax, in states and cities that have one.

What you pay as the employer

• Social Security tax at 6.2% of each employee's wages, up to $184,500 in 2026, matching the employee's share.
• Medicare tax at 1.45% of all wages, matching the employee's share.
• Federal unemployment tax (FUTA) at 6.0% of the first $7,000 of each employee's wages. If you pay state unemployment tax, you can usually take a credit of up to 5.4%, so the net rate is 0.6%, or $42 per employee per year. Employers in "credit reduction" states, which haven't repaid federal loans, get a smaller credit and pay more.
• State unemployment tax (SUTA), at a rate your state assigns, on wages up to the state's own wage base. New employers usually start at a set rate.
• Other state or local taxes, in some states, such as training or disability funds.

Together, Social Security and Medicare are called FICA. The employer and employee each pay 7.65%, for a combined 15.3%, which is the same rate a self-employed person pays as self-employment tax.

A worked paycheck

Take an employee paid $2,000 gross every two weeks.

Withheld from the employee:

• Social Security: $2,000 × 6.2% = $124.00
• Medicare: $2,000 × 1.45% = $29.00
• Federal income tax: from the IRS tables, based on their W-4
• State income tax: where it applies

Paid by you, the employer:

• Social Security: $124.00
• Medicare: $29.00
• FUTA: $2,000 × 0.6% = $12.00, until their wages for the year reach $7,000, after which no more FUTA is due for them that year
• SUTA: your state rate on wages up to the state wage base

Over a year, on a $52,000 salary, your share of Social Security and Medicare alone is $3,978, plus $42 of FUTA and your state's unemployment tax.

How benefits change the math

Some benefits are deducted from pay before tax, which changes what you withhold and, in some cases, what you pay.

• Traditional 401(k) contributions are taken out before income tax, so they reduce income tax withholding. They're still subject to Social Security and Medicare.
• Health insurance premiums paid through a cafeteria (Section 125) plan are usually exempt from income tax and from Social Security and Medicare, which lowers both the employee's and your FICA.
• Taxable fringe benefits, such as a personal use of a company car, are added to wages and taxed like pay.

Your payroll provider needs to know how each deduction is set up so it taxes it correctly.

Payroll for S corporation owners

If your LLC or corporation has elected S corporation status, you're an employee of your own company, and everything in this guide applies to the salary you pay yourself: withholding, the employer's FICA, FUTA, SUTA, deposits and returns. Distributions you take on top of salary aren't wages and carry no payroll tax. Our guide to when to elect S corp status explains why the salary has to be reasonable.

When to deposit

You don't send payroll taxes with each paycheck. You deposit them on a schedule the IRS assigns based on how much tax you reported during a lookback period, which for Form 941 filers is the prior four calendar quarters.

• Monthly depositor: if your total employment taxes in the lookback period were $50,000 or less. Deposit each month's taxes by the 15th of the following month, so January's are due by February 15.
• Semiweekly depositor: if they were more than $50,000. Taxes for paydays from Wednesday to Friday are due the following Wednesday, and for paydays from Saturday to Tuesday, the following Friday.
• The $100,000 rule: on any day you accumulate $100,000 or more of tax, deposit it by the next business day.
• Small quarterly amounts: if your tax for a quarter is less than $2,500, you can generally pay it with your quarterly return instead of depositing.

New employers usually start as monthly depositors. All federal tax deposits must be made electronically, through your IRS business tax account, IRS Direct Pay or EFTPS.

The returns you file

• Form 941, quarterly, reporting wages, withholding and FICA. Due by the last day of the month after each quarter: April 30, July 31, October 31 and January 31.
• Form 944, annually, instead of Form 941, only if the IRS has notified you that you're in the Form 944 program, which is for the smallest employers.
• Form 940, annually, for FUTA, due January 31, or February 10 if you deposited all your FUTA tax on time.
• Form W-2 for each employee, and Form W-3 with the Social Security Administration, by January 31.
• State returns for withholding and unemployment, on your state's schedule.

The rule that can make you personally liable

The income tax and the employee's share of Social Security and Medicare you withhold are called trust fund taxes, because you hold them in trust for the government. They are not your business's money.

If they aren't paid over, the IRS can assess the trust fund recovery penalty, equal to the full unpaid amount, against any responsible person who willfully failed to pay them. That can include owners, officers, partners and even employees with authority over the business's bank account. An LLC or a corporation doesn't protect you from it. When cash is tight, payroll taxes are the last bill to skip, not the first.

Why almost every small business uses payroll software

Every rule above is mechanical, and payroll software applies all of them. It calculates withholding from the tables, tracks each employee against the Social Security and FUTA wage bases, deposits taxes on the right schedule, files your quarterly and annual returns, and produces W-2s. Most providers also file state returns and new hire reports.

Gusto's Simple plan, for example, costs $49 a month plus $6 per person and includes unlimited payroll runs and tax filings. For a first employee, that's about $660 a year, far less than the cost of one late-deposit penalty. Our comparison of Gusto, ADP and Rippling covers the main options.

Mistakes that cost employers money

• Missing deposit deadlines. Penalties for late deposits start quickly and rise with time.
• Treating employees as contractors to avoid payroll taxes. Our guide to 1099 vs W-2 workers explains the tests.
• Registering in the wrong state for a remote employee, who is usually taxed where they work.
• Forgetting the wage bases, and over-withholding Social Security after an employee passes $184,500.
• Using withheld tax as working capital. It isn't yours to spend.

Budgeting for payroll taxes

When you plan a hire, budget at least 7.65% on top of salary for your share of FICA, plus $42 for FUTA, plus your state unemployment rate on its wage base, and workers' compensation insurance. Then add benefits. Our guide to hiring your first employee puts the full cost of a hire together, step by step.