Payroll taxes are the taxes that fund Social Security, Medicare, and unemployment insurance. If you have employees — or if you're an S-Corp owner paying yourself a salary — payroll taxes are one of your largest and most complex tax obligations.
For employees, payroll taxes are largely invisible. They appear as line items on a pay stub, deducted automatically. For employers, they're a significant expense and compliance burden. Late deposits, incorrect filings, and misclassified workers can trigger penalties that escalate fast — the IRS treats payroll tax violations more seriously than almost any other tax issue.
This guide explains every component of payroll taxes, who pays what, how the math works, and what every business owner needs to know to stay compliant and avoid costly mistakes.
The Components of Payroll Tax
Payroll taxes have four main components. Two are shared between employer and employee. Two are paid entirely by the employer.
Social Security Tax (OASDI)
Rate: 12.4% total — 6.2% paid by the employee, 6.2% paid by the employer.
Wage base: Applies only to wages up to the Social Security wage base (approximately $168,600 for 2024, adjusted annually for inflation). Wages above this amount are not subject to Social Security tax.
What it funds: Retirement benefits, disability benefits, and survivor benefits under the Social Security program.
Example: An employee earns $100,000. Employee's share: $100,000 x 6.2% = $6,200 (withheld from paycheck) Employer's share: $100,000 x 6.2% = $6,200 (paid by employer) Total Social Security tax: $12,400
Example: An employee earns $200,000. Employee's share: $168,600 x 6.2% = $10,453 (nothing on wages above $168,600) Employer's share: $168,600 x 6.2% = $10,453 Total Social Security tax: $20,906
Medicare Tax (HI)
Rate: 2.9% total — 1.45% paid by the employee, 1.45% paid by the employer.
Wage base: No cap. Medicare tax applies to all wages regardless of amount.
What it funds: The Medicare hospital insurance program.
Additional Medicare Tax: Employees earning over $200,000 (single) or $250,000 (married filing jointly) owe an additional 0.9% Medicare tax. This additional tax is paid only by the employee — the employer has no matching obligation. Employers must begin withholding the additional 0.9% once an employee's wages exceed $200,000 in a calendar year (regardless of filing status).
Example: An employee earns $250,000. Employee's Medicare: $250,000 x 1.45% = $3,625 Additional Medicare (employee only): ($250,000 - $200,000) x 0.9% = $450 Employer's Medicare: $250,000 x 1.45% = $3,625 Total Medicare tax: $7,700
FICA Combined
Social Security + Medicare = FICA (Federal Insurance Contributions Act).
Combined FICA rate: 15.3% (7.65% employee + 7.65% employer) on wages up to the Social Security wage base. Above the wage base, the rate drops to 2.9% (Medicare only).
For a quick calculation on most employees: multiply wages by 7.65% for the employee's share, and the same for the employer's share.
Federal Unemployment Tax (FUTA)
Rate: 6.0% on the first $7,000 of wages per employee per year.
Credit: Employers who pay state unemployment tax on time receive a credit of up to 5.4%, reducing the effective FUTA rate to 0.6%.
Effective cost: $7,000 x 0.6% = $42 per employee per year (in most cases).
Paid entirely by the employer. Employees do not contribute.
What it funds: The federal portion of the unemployment insurance system. State unemployment benefits are funded by state unemployment tax.
State Unemployment Tax (SUTA/SUI)
Rate: Varies by state and by employer. New employers receive a default rate. Experienced employers receive a rate based on their history of unemployment claims — more layoffs mean higher rates.
Typical range: 0.5% to 7%+ on wages up to a state-determined wage base (varies from $7,000 to $52,700+ depending on the state).
Paid entirely by the employer in most states. A few states (Alaska, New Jersey, Pennsylvania) require employee contributions as well.
Federal Income Tax Withholding
In addition to FICA and unemployment taxes, employers must withhold federal income tax from employee wages based on the information provided on the employee's Form W-4.
The amount withheld depends on:
- Filing status indicated on W-4
- Number of allowances or adjustments claimed
- Pay frequency (weekly, biweekly, monthly)
- Gross wages for the pay period
The employer calculates withholding using IRS Publication 15-T (or payroll software does it automatically). The withheld amount is an estimate of the employee's income tax liability — the actual tax is reconciled when the employee files their personal return.
Important: Federal income tax withholding is the employee's money — the employer is simply collecting and remitting it on the employee's behalf. If you fail to remit it, you're essentially stealing from both the employee and the government.
State and Local Withholding
Most states with an income tax require employers to withhold state income tax from wages. The calculation varies by state.
Some cities and localities impose their own income tax with withholding requirements (New York City, Philadelphia, many Ohio cities, etc.).
Employers with employees in multiple states must withhold for each applicable state — typically the state where the employee works, though rules vary for remote workers and states with reciprocity agreements.
The Employer's True Cost of Payroll
Many business owners don't fully grasp the total cost of an employee beyond their salary:
Employee salary: $60,000 Employer Social Security (6.2%): $3,720 Employer Medicare (1.45%): $870 FUTA (0.6% on $7,000): $42 State unemployment (estimated 3% on $10,000): $300 Workers' compensation (varies): $600 (estimated) Total employer payroll taxes: approximately $5,532
True cost of a $60,000 employee: approximately $65,532 (before benefits like health insurance, retirement match, etc.)
The employer's payroll tax burden adds roughly 8-10% on top of wages for most employees. This is a deductible business expense — the employer's share of payroll taxes is fully deductible.
Payroll Tax Deposit Requirements
The IRS requires you to deposit withheld income tax and FICA taxes according to one of two schedules:
Monthly deposit schedule: If your total payroll tax liability during the lookback period (July 1 to June 30 of the prior year) was $50,000 or less, you deposit monthly. Deposits are due by the 15th of the following month.
Semi-weekly deposit schedule: If your lookback period liability exceeded $50,000, you deposit semi-weekly. For wages paid Wednesday through Friday, deposits are due the following Wednesday. For wages paid Saturday through Tuesday, deposits are due the following Friday.
$100,000 next-day rule: If you accumulate $100,000 or more in taxes on any single day, you must deposit by the next business day — regardless of your regular schedule.
New employers: Default to monthly until the lookback period is established.
How to deposit: All federal payroll tax deposits must be made through EFTPS (Electronic Federal Tax Payment System). You cannot mail a check for payroll tax deposits.
Late deposit penalties:
- 1-5 days late: 2% penalty
- 6-15 days late: 5% penalty
- 16+ days late: 10% penalty
- More than 10 days after first IRS notice: 15% penalty
These penalties are on the amount of the deposit, and they add up quickly. A $10,000 deposit that's 6 days late costs $500. Payroll taxes are the one area where the IRS has almost zero tolerance for late payment.
Payroll Tax Filing Requirements
Form 941 — Employer's Quarterly Federal Tax Return
Filed quarterly (due April 30, July 31, October 31, January 31) reporting:
- Total wages paid
- Federal income tax withheld
- Social Security and Medicare taxes (both employee and employer shares)
- Total deposits made during the quarter
- Any balance due or overpayment
Even if you have no employees in a quarter, you must file Form 941 (or file a final return if the business has permanently stopped paying wages).
Form 940 — Annual Federal Unemployment Tax Return
Filed annually (due January 31) reporting:
- Total wages subject to FUTA
- FUTA tax calculated
- State unemployment tax credits
- FUTA tax due or overpaid
FUTA deposits are required quarterly if the accumulated tax exceeds $500.
Form W-2 — Wage and Tax Statement
Issued to each employee and filed with the Social Security Administration by January 31. Reports the employee's wages, federal income tax withheld, Social Security wages and tax, Medicare wages and tax, and state/local information.
Form W-3 — Transmittal of Wage and Tax Statements
Filed with the SSA along with all W-2 copies. It's a summary of all W-2 information.
State filings: Each state has its own quarterly and annual payroll tax filing requirements. Most require quarterly unemployment tax returns and annual reconciliation reports.
The Trust Fund Recovery Penalty
This is the most serious payroll tax penalty — and it's personal.
Federal income tax and the employee's share of FICA are "trust fund" taxes. The employer collects them from employees' wages and holds them in trust until depositing with the IRS. If the employer fails to deposit these taxes, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any "responsible person" — personally.
Responsible persons include:
- Business owners
- Corporate officers
- Partners
- Anyone with authority over financial decisions or check-signing authority
- Sometimes bookkeepers or payroll managers
The penalty is equal to 100% of the unpaid trust fund taxes. And it's assessed against the individual, not the business. Even if your business closes, the IRS can pursue you personally for unpaid trust fund taxes.
This penalty cannot be discharged in bankruptcy. It follows you until it's paid.
The TFRP is the reason payroll taxes should always be your first priority. Before rent, before vendors, before anything else — deposit your payroll taxes on time. If your business is struggling financially, payroll taxes are the last thing you should fall behind on.
Worker Classification: Employee vs. Independent Contractor
Misclassifying employees as independent contractors is one of the most common and costly payroll tax mistakes.
Why it matters: If a worker is an employee, you must withhold income tax, withhold and match FICA, pay FUTA and SUTA, provide workers' compensation, and issue a W-2. If they're an independent contractor, you do none of this — you simply pay them and issue a 1099-NEC.
The temptation to classify workers as contractors is obvious — it saves 7.65% in employer FICA, plus unemployment taxes, plus workers' comp. But if the IRS reclassifies them as employees, you owe:
- All back payroll taxes (employer and employee shares)
- Penalties and interest
- Potential TFRP
- State tax consequences
- Potential liability for the employee's unpaid income tax withholding
The IRS uses a multi-factor test to determine classification, focusing on three categories:
Behavioral control: Do you control how the worker performs the job? Employees are told how, when, and where to work. Contractors control their own methods.
Financial control: Do you control the financial aspects? Employees are reimbursed for expenses, provided tools, and paid a regular wage. Contractors invest in their own tools, have potential for profit or loss, and invoice for services.
Relationship type: Is there a written contract? Employee benefits? Permanence of the relationship? An ongoing, integral relationship suggests employment.
When in doubt, err on the side of classifying workers as employees. The cost of misclassification far exceeds the savings.
Payroll for S-Corp Owners
If you operate an S-Corporation, you must pay yourself a reasonable salary and run it through payroll. This means:
- Withholding federal and state income tax from your own paycheck
- Withholding employee FICA (7.65%)
- Paying employer FICA (7.65%)
- Paying FUTA and SUTA
- Filing Form 941 quarterly
- Issuing yourself a W-2
Many S-Corp owners resist running payroll because of the cost and complexity. But it's not optional — the IRS requires it, and failure to pay reasonable compensation is a common audit trigger.
Payroll services for single-owner S-Corps typically cost $30-$100/month and handle all calculations, deposits, and filings. The cost is deductible.
Common Payroll Tax Mistakes
Missing deposit deadlines. Even a few days late triggers penalties. Set up automatic payroll processing to ensure deposits happen on time.
Misclassifying employees as contractors. Saves money short-term, creates massive liability long-term. The IRS, Department of Labor, and state agencies all audit for misclassification.
Not withholding additional Medicare tax. Once an employee's wages exceed $200,000, the additional 0.9% must be withheld. Many small employers miss this threshold.
Incorrect W-4 processing. Using an outdated W-4 form or miscalculating withholding leads to under- or over-withholding for employees.
Failing to pay state unemployment tax on time. Late SUTA payments can eliminate the FUTA credit, increasing your effective FUTA rate from 0.6% to 6.0% — a 10x increase.
Using payroll tax funds for business expenses. Withholding trust fund taxes and spending them on operating expenses instead of depositing them is the fastest path to personal liability and potential criminal charges.
Not filing quarterly returns. Even if you've made all deposits on time, failing to file Form 941 triggers separate failure-to-file penalties.
Not issuing W-2s on time. W-2s are due to employees by January 31. Late issuance carries penalties of $60-$310 per form depending on how late.
How a CPA Helps with Payroll Taxes
A CPA ensures your payroll tax obligations are handled correctly:
Setup. Registering with federal and state agencies, selecting the correct deposit schedule, and configuring payroll systems.
Compliance. Ensuring deposits are made on time, returns are filed accurately, and year-end forms are issued correctly.
S-Corp salary optimization. Determining the right salary for S-Corp owners that satisfies the IRS while minimizing total tax.
Worker classification. Advising on whether workers should be classified as employees or contractors and documenting the analysis.
Multi-state compliance. Managing withholding, unemployment, and filing requirements across multiple states.
Problem resolution. If you've fallen behind on payroll taxes, a CPA can negotiate payment plans, request penalty abatement, and help you get back into compliance before the situation escalates.
Payroll taxes are non-negotiable — they must be paid correctly and on time. The consequences of non-compliance are among the most severe in the entire tax code.
Find a CPA who specializes in payroll and small business tax compliance at ListMyCpa.com. Search by state, city, and specialization to connect with a professional who keeps your payroll taxes in order.