Understanding Payroll Taxes: A Complete Guide 2025
Your business is growing fast, you’re hiring employees, and you’re feeling on top of the world – that is, before an asteroid called payroll taxes comes crashing into your life.
FICA. FUTA. SUTA. 7.5%. 2%. There are just so many numbers and abbreviations.
What do all these acronyms mean? Why can’t you grow your business without worrying about all this?
Well, it’s not as complex as it sounds.
There are a lot of nuances when it comes to payroll taxes, but we promise we’ll break everything down and make it simple for you.
By the end of this article, you’ll know what payroll taxes are, all the different types, the nuances that you must be aware of, and practical steps you can take to tackle them effectively.
What Are Payroll Taxes?
Payroll taxes are the taxes you, as an employer, are required to withhold from your employees’ compensation: wages, bonuses, commissions, etc.
These taxes fund essential government programs like Social Security, Medicare, and unemployment insurance.
So every time you pay your team, you’re not just sending out salaries, you’re also acting as a tax collector for the government by calculating exact amounts, withholding them, matching certain portions, and sending everything to the right government agencies.
Even if you have only one employee on your payroll, handling your taxes incorrectly by underpaying, overpaying, paying late, or filing the wrong forms can trigger penalties, a lot of payroll overhead, and administrative headaches.
A Breakdown Of Payroll Taxes
Now that you understand the what, it’s time to break down the how much. Payroll taxes come in a few buckets, explained below.
Federal income taxes
Federal income tax withholding is the process of deducting a portion of an employee’s wages and submitting it to the IRS throughout the year. It helps employees avoid large tax bills or underpayment penalties when filing their annual return.
Income tax withholding is dependent on a number of different factors, with most of the crucial information laid out in the Form W-4.
Employees fill it out when they’re hired, and it includes details like their filing status, number of dependents, additional income, deductions, additional withholding amounts, etc.
FICA taxes: Social Security and Medicare
FICA (Federal Insurance Contributions Act) taxes consist of Social Security and Medicare taxes, and these are usually what most people associate with payroll taxes.
Both employers and employees contribute to these equally.
The Social Security tax is 6.2%, paid by both the employee and the employer, for a total of 12.4%. As of 2025, the wage base limit (the maximum wage subject to the tax) for Social Security is $176,100.
The tax for Medicare is 1.45% for the employer and 1.45% for the employee, for a total Medicare tax of 2.9%.
For individuals earning over $200,000, the employer is required to withhold an additional 0.9% on the wages paid over $200K until the end of the calendar year.
Employers aren’t required to match this amount; you must only withhold this from your employee’s wages.
Your job is to withhold the employee’s tax contribution, match it for the social security and medicare parts (a total of 7.65%), and pay both halves to the government.
Federal unemployment tax (FUTA)
Employers are responsible for paying the Federal Unemployment Tax Act (FUTA) tax, which funds unemployment benefits for workers who have lost their jobs.
This one’s 100% your responsibility; employees don’t contribute.
The FUTA tax rate is 6% on the first $7,000 of wages paid to each employee in a calendar year.
However, you (the employer) may receive a credit of up to 5.4% for paying state unemployment taxes on time and in full, resulting in a net FUTA tax rate of 0.6%.
So, if you’re eligible, you’ll pay only $42 per employee per year in FUTA.
State unemployment tax (SUTA)
Employers are also responsible for paying state unemployment taxes, which fund unemployment benefits at the state level.
The tax rates and wage bases vary by state and are subject to state-specific regulations, but to make it easier for you, we’ve compiled the key data for all states in the table below:
| State | 2025 SUTA Wage Base | 2025 Employer Rate Range | Notes |
| Alabama | $8,000 | 0.14–5.34% | - Employee contribution: None - New-employer rate: Schedule A (2.7%)- 0.06% ESA training tax- Nonprofits may opt to reimburse rather than pay SUTA |
| Alaska | $51,700 | 1.0–5.4% | - Employee contribution: 0.50% - New-employer rate: varies by schedule (no fixed “new” rate) - No extra taxes - Nonprofits reimburse |
| Arizona | $8,000 | 0.04–9.72% | - Employee contribution: none- New-employer rate: 2.0% - No additional surtaxe - Nonprofits reimburse |
| Arkansas | $7,000 | 0.20–10.10% | - Employee contribution: none - New-employer rate: 1.9%- 0.10% Administrative Assessment- Nonprofits reimburse |
| California | $7,000 | 1.5–6.2% | - Employee contribution: 3.4% - New-employer rate: Schedule F - 0.10% Employment Training Tax (ETT)- Nonprofits reimburse |
| Colorado | $27,200 | 0.64–8.86% | - Employee contribution: none - New-employer rate: 3.05% (3.08–7.65% for construction) - No separate training tax; support and solvency surcharges vary by industry - Nonprofits reimburse |
| Connecticut | $26,000 | 1.1–8.9% | - Employee contribution: none - New-employer rate: 2.2% - No additional surtaxes - Nonprofits reimburse |
| Delaware | $12,500 | 0.30–5.40% | - Employee contribution: none - New-employer rate: 1.0%- 0.20% special training assessment - Nonprofits reimburse |
| D.C. | $9,000 | 1.9–7.4% | - Employee contribution: none - New-employer rate: 2.7%- 0.20% administrative assessment - Nonprofits reimburse |
| Florida | $7,000 | 0.1–5.4% | - Employee contribution: none - New-employer rate: 2.7% - No additional surtaxes - Nonprofits reimburse |
| Georgia | $9,500 | 0.04–8.1% | - Employee contribution: none - New-employer rate: 2.64% (fixed through 2026) - 0.06% administrative assessment - Nonprofits reimburse |
| Hawaii | $62,000 | 0.0–5.6% | - Employee contribution: 2.4% - New employer: Schedule C (varies by business type) - 0.01% employment-training assessment - Nonprofits reimburse |
| Idaho | $55,300 | 0.225–5.4% | - Employee contribution: none - New-employer rate: 1.00% - Small workforce and admin surtaxes (0.00–0.00675% plus 0.00–0.03825%) - Nonprofits reimburse |
| Illinois | $13,916 | 0.2–7.3% | - Employee contribution: none - New-employer rate: 3.65% (includes FRR) - 0.55% fund-building (FRR) tax - Nonprofits reimburse |
| Indiana | $9,500 | 0.5–7.4% | - Employee contribution: none - New-employer: 2.5% (1.6% for governmental employers) - No solvency surcharge - Nonprofits reimburse |
| Iowa | $39,500 | 0–7.0% | - Employee contribution: none - New-employer: 1.0% (7.0% for construction) - No additional surtaxes - Nonprofits reimburse |
| Kansas | $14,000 | 0.00–6.65% | - Employee contribution: none - New-employer: 1.75% (5.55% for construction) - No fund-building surcharge (0%) - Nonprofits reimburse |
| Kentucky | $11,700 | 0.3–9.0% | - Employee contribution: none - New-employer: Schedule A (2.7%; 9–10% for construction) - 0.075% SCUF (state training fund) - Nonprofits reimburse |
| Louisiana | $7,700 | 0.09–6.2% | - Employee contribution: none - New-employer: varies by industry (NAICS-based) - Incumbent Worker Training tax + Integrity Social Charge Fund (varies) - Nonprofits reimburse |
| Maine | $12,000 | 0.0–5.75% | - Employee contribution: 2.11% - New-employer: Schedule A (2.11%) - 0.14% CSSF + 0.16% UPAF workforce fund taxes - Nonprofits reimburse |
| Maryland | $8,500 | 0.3–7.5% | - Employee contribution: none - New-employer: Table A (2.6%; 3.3% for construction) - No additional assessments - Nonprofits reimburse |
| Massachusetts | $15,000 | 0.83–12.65% | - Employee contribution: none - New-employer: Schedule D (2.13%; 5.45% for construction) - 0.056% workforce training tax (WTF) - Nonprofits reimburse |
| Michigan | $9,000 | 0.06–10.30% | - Employee contribution: none - New-employer: 2.7% (4.9% for construction) - No additional surtaxes - Nonprofits reimburse |
| Minnesota | $43,000 | 0.40–8.90% | - Employee contribution: none - New-employer: varies by industry (1.0–8.9%) - 0.10% workforce development assessment - 5% solvency surcharge (fund deficit) - Nonprofits reimburse |
| Mississippi | $14,000 | 0.2–5.4% | - Employee contribution: none - New-employer: 1.0–1.2% (graduated by payroll) - 0.2% combined workforce surcharges (MS Works, training) - Nonprofits reimburse |
| Missouri | $9,500 | 0.0–6.0% | - Employee contribution: none - New-employer: 2.376% (1.00% for nonprofits) - 0.02% automation surcharge - Nonprofits reimburse (pay 1% vs 2.376%) |
| Montana | $45,100 | 0.0–6.12% | - Employee contribution: none - New-employer: Schedule 1 (1.0–2.0% by payroll size) - 0.13–0.18% Admin Fund Tax - Nonprofits reimburse |
| Nebraska | $9,000/$24,000 | 0–5.4% | - Employee contribution: none - New-employer: 1.25% (5.4% for construction) - 20% SUIT allocation surcharge on SUI rate - Nonprofits reimburse |
| Nevada | $41,800 | 0.25–5.4% | - Employee contribution: none - New-employer: 2.95%- 0.05% Career Enhancement Program surcharge - Nonprofits reimburse |
| New Hampshire | $14,000 | 0.1–7.0% | - Employee contribution: none - New-employer: Table I (2.7% as of 7/2024) - 0.4% administrative surcharge - Nonprofits reimburse |
| New Jersey | $43,300 | 0.6–6.4% | - Employee contribution: 3.1% - New-employer: Table D (3.1%, FY2025) - 0.10% Workforce Dev + 0.0175% supplemental surcharges - Nonprofits reimburse |
| New Mexico | $33,200 | 0.33–6.4% | - Employee contribution: none - New-employer rate: 1.0% (or industry average, if higher) - No additional assessments - Nonprofits reimburse |
| New York | $12,800 | 2.025–9.825% | - Employee contribution: none - New-employer rate: 4.025% - 0.075% Reemployment Services surcharge - 0.12% Interest Assessment surcharge - Nonprofits reimburse |
| North Carolina | $32,600 | 0.06–5.76% | - Employee contribution: none - New-employer rate: 1.0% - No additional surtaxes - Nonprofits reimburse |
| North Dakota | $45,100 | 0.14–9.69% | - Employee contribution: none - New-employer: 1.03% (6.09% for govt; 9.69% for construction) - No additional surtaxes - Nonprofits reimburse |
| Ohio | $9,000 | 0.4–10.1% | - Employee contribution: none - New-employer rate: 2.7% (5.6% for construction) - No additional surtaxes - Nonprofits reimburse |
| Oklahoma | $28,200 | 0.3–9.2% | - Employee contribution: none - New-employer: Conditional Factor D (1.5%) - 5% technology reinvestment surcharge - Nonprofits reimburse |
| Oregon | $54,300 | 0.9–5.4% | - Employee contribution: none - New-employer: Schedule III (2.4%)- Quarterly offset surtax (~0.109–0.139%) - Nonprofits reimburse |
| Pennsylvania | $10,000 | 1.419–10.373% | - Employee contribution: 0.07% - New-employer: 3.822% (10.592% for construction) - 0% bond-interest surtax - Nonprofits reimburse |
| Rhode Island | $29,800/$31,300 | 0.89–9.49% | - Employee contribution: none - New-employer: Schedule G (0.89%)- 0.21% Job Dev. Fund tax - Higher base ($31,300) for max-rate employers - Nonprofits reimburse |
| South Carolina | $14,000 | 0–5.4% | - Employee contribution: none - New-employer rate: 0.29%- 0.06% contingency surcharge (0.00% solvency) - Nonprofits reimburse |
| South Dakota | $15,000 | 0–8.8% | - Employee contribution: none - New-employer: Schedule C (1.2% general; 1.0% for construction) - 0.02% admin + 0–0.55% investment surtaxes - Nonprofits reimburse |
| Tennessee | $7,000 | 0.01–10.0% | - Employee contribution: none - New-employer: varies by NAICS (per Table 6) - No additional surtaxes - Nonprofits reimburse |
| Texas | $9,000 | 0.25–6.25% | - Employee contribution: none - New-employer: 2.7% (or industry average, if higher) - 0.10% training investment tax - Nonprofits reimburse |
| Utah | $48,900 | 0.2–7.2% | - Employee contribution: none - New-employer: 7.2% (for construction); other rates vary by industry - No additional surtaxes - Nonprofits reimburse |
| Vermont | $14,800 | 0.4–5.4% | - Employee contribution: none - New-employer: Schedule 1 (1.0%) - No additional surtaxes - Nonprofits reimburse |
| Virginia | $8,000 | 0.1–6.2% | - Employee contribution: none - New-employer: 2.5% (6.2% for foreign/delinquent) - 0.05% new administrative fee (2025) - Nonprofits reimburse |
| Washington | $72,800 | 0.27–6.02% | - Employee contribution: none - New-employer: 90% of industry average (min 1.0%) - 0.03% EAF + 0.03% solvency surtaxes - Nonprofits reimburse |
| West Virginia | $9,500 | 1.5–8.5% | - Employee contribution: none - New-employer: Column C rates (2.7%; 8.5% for construction) - No additional assessments - Nonprofits reimburse |
| Wisconsin | $14,000 | 0.0–12% (small); 0.05–12% (large) | - Employee contribution: none - New-employer: Schedule D (3.05% small; 3.25% large; 2.90%/3.10% for construction) - No additional surtaxes - Nonprofits reimburse |
| Wyoming | $32,400 | 0–8.5% | - Employee contribution: none - New-employer: varies by employer class - 0.0423% Employment Support Fund + 0.0143% Workforce Dev training surtaxes - Nonprofits reimburse |
Some states also have additional taxes for disability programs and paid family leave programs.
Six states operate state disability insurance (SDI) programs, whereas another 16 have or will have paid family and medical leave insurance programs (PFML). Here’s a breakdown:
| State | Program(s) | Wage base (2025) | Employee contribution rate | Employer contribution rate | Key exemptions | Notes |
| California | SDI; PFML | None (no limit) | 1.20% (SDI, which includes PFML) | 0% | – | PFML is fully funded by employee SDI deductions. Employers have no share. |
| Connecticut | PFML | $176,100 | 0.50% | 0% | – | – |
| Colorado | PFML | $176,100 | 0.45% (0.90% if <10 employees) | 0.45% (0% if <10 employees) | <10 employees (no employer share) | – |
| Delaware | PFML (effective Jan 2025) | $176,100 | 0.40% (medical), 0.08% (family), 0.32% (parental) | 0.40% (med), 0.08% (fam), 0.32% (parent) [50% tax credit] | <10 exempt; 10–24 pay only parental | Contributions begin Jan 2025. Employers may deduct 50% of their share. |
| District of Columbia | PFML | No cap (all wages) | 0% | 0.75% (through June 30, 2025) | – | – |
| Hawaii | SDI | $1,441.72 (weekly max) | 50% of plan cost (≤0.50% of wages; max $7.21/wk) | 50% of the plan cost | – | Employees pay up to $7.21/week; the employer pays the remaining cost. |
| Maine | PFML | $176,100 | 0.50% | 0.50% (0% if <15 employees) | <15 employees (no employer share) | – |
| Maryland | PFML (from Jul 2025) | $176,100 | 0.45% | 0.45% (0% if <15 employees) | <15 employees (no employer share) | – |
| Massachusetts | PFML | $176,100 | 0.18% (family), 0.28% (medical) | 42% of the medical portion (if ≥25 employees) | <25 employees (no employer share) | Employers may pay up to 42% of medical leave insurance (no requirement to fund family leave). |
| Minnesota | PFML (effective Jan 2026) | Social Security cap (2025: $160,200; lower base if <30 employees) | Employees pay up to 0.35% (med + fam), 0.20% (med only), 0.15% (fam only) | Employers match (50/50 split) | – | – |
| New Hampshire | PFML (voluntary) | – | – | – | Optional participation (private plan) | Employers get a 50% tax credit for voluntary contributions. No mandatory contributions. |
| New Jersey | SDI; PFML | SDI: $42,300; PFML: $161,400 | SDI: 0%; PFML: 0.09% | SDI: ~0.5% (new employers pay 0.5%; others 0.1–0.75% by experience); PFML: 0% | – | NJ’s SDI (TDB) includes paid family leave coverage. |
| New York | SDI; PFML | SDI: $43,300; PFML: $165,400 | SDI: 0.23%; PFML: 0.33% | SDI: ~0.5% (new employers 0.5%, others 0.10–0.75% exp-rated); PFML: 0% | – | NY’s disability insurance includes paid family leave. |
| Oregon | PFML | $176,100 | 0.60% (1.00% if <25 employees) | 0.40% (0% if <25 employees) | <25 employees (no employer share) | – |
| Rhode Island | SDI; PFML | SDI: $89,200 | 1.30% (SDI, includes PFML) | 0% | – | PFML contributions are included in the 1.3% SDI rate. |
| Vermont | PFML (voluntary) | – | – | – | Optional participation (private plan) | – |
| Washington | PFML; LTC | PFML: $176,100; LTC: – | PFML: 0.66% (0.92% if <50 employees); LTC: 0.58% | PFML: 0.26% (0% if <50); LTC: 0% | <50 employees (no PFML employer share) | Washington is the only state with LTC (employees may opt out); PFML split at 50-employee threshold. |
Additional local or city taxes
In some jurisdictions, like New York City and San Francisco, local payroll taxes may apply. These can include local income taxes, employment taxes, and school district taxes.
International payroll taxes (if you hire outside the US)
If you’re hiring talent internationally, you’re often subject to that country’s tax laws, not just the US.
For example, in Canada, employers must handle the CPP (Canada Pension Plan), EI (Employment Insurance), and income tax remittance.
Since these rules and regulations vary significantly, it’s best to use a global payroll service or EOR (employer of record) to ensure you’re compliant.
Payroll Taxes vs Income Tax
It’s easy to lump payroll taxes and income taxes into the same bucket because they’re both withheld from an employee’s paycheck during payroll runs. However, under the hood, they’re doing very different jobs.
Income tax withholding refers to the amount you deduct from your employees’ paychecks based on their earnings, filing status, and W-4 selections.
This money goes to the federal government to fund general programs like defense, education, and infrastructure.
On the other hand, payroll taxes are primarily used to fund specific social insurance programs like Social Security, Medicare, unemployment insurance, and in some states, paid family leave or disability insurance.
As we broke down earlier, payroll taxes are often split between the employer and employee, with fixed contribution rates and wage caps.
While both types of taxes are handled during payroll runs and appear on the same pay stub, their mechanics, funding structure, and end destinations are entirely different.
How To Calculate Payroll Taxes (With Examples)
Calculating payroll taxes involves several components, like gross pay, deductions, federal withholding, FICA, and state/local taxes.
Each step requires careful application of current rules and tables, which can change annually.
For 2025, for example, the IRS set the single filer standard deduction at $15,000 (up from $14,600 in 2024) and updated all tax brackets.
In practice, you compute each paycheck by working through these steps in order. Here’s a step-by-step guide on how you can do it:
- Step 1. Calculate the gross pay. This includes wages, salaries, bonuses, commissions, and any other taxable compensation.
- For hourly employees, it’s hours worked x hourly rate. Include overtime at 1.5x pay for hours over 40/week.
- For salaried employees, it’s annual salary ÷ number of pay periods.
- Step 2. Subtract any pre-tax contributions from gross pay to get taxable wages. Common deductions include retirement plan (401(k), 403(b)), health insurance premiums, HSA/FSA contributions, and certain commuter benefits.
- Step 3. Withhold federal income tax. Use the employee’s W-4 information and the taxable wages (after pre-tax deductions). Apply the annual standard deduction (2025: $15,000 for single, $30,000 for married filing jointly) on an annual basis. Subtract the standard deduction, and using the 2025 federal brackets, compute tax on the annual taxable income. Divide the annual tax by the number of pay periods to calculate per-paycheck withholding.
- Step 4. Calculate the FICA taxes and the FUTA taxes as outlined above.
- Step 5. Calculate any state or local income taxes and SUTA taxes that you must withhold.
- Step 6. Calculate any state SDI/PFML taxes as applicable. Refer to the table above.
- Step 7. Withhold the taxes, remit them to the IRS, match employer contributions, and file the correct forms.
For instance, let’s consider Jamie, a marketing manager in California, making $100,000/year, paid monthly. He has a $500/month 401(k) contribution, which is not subject to federal or state income tax, but is still included in wages for Social Security, Medicare, and FUTA taxation.
Gross income per pay period: 100,000/12 = $8,333.33
Taxable wage base: $8,333.33 - $500 = $7,833.33/month
Federal income tax withholding: According to IRS Publication 15-T (2025), a single filer with $7,833.33/month falls into the 22% bracket. The monthly table shows that the tax to be withheld is $464.92/month + 22% of the amount exceeding $5,290.
That gives us a total tax withheld of $464.92 + 22% of (7833.33 - 5290), which yields a value of $1,024.41/month. (The standard deduction of $15K is reflected in the threshold values of the table, so no need to deduct that separately.)
FICA taxes: Social Security is 6.2% on total gross wages of $8,333.33, which is $516.67, and Medicare is 1.45% on total gross wages, which gives us $120.83/month.
FUTA: It is 6% of $7,000. However, since you will pay state unemployment taxes on time, your net FUTA rate will only be 0.6%, which gives us $42/year, or $3.5/month.
California SUTA: New California employers pay 3.4% on the first $7,000. That equals $238/year or about $19.83 per month in SUTA tax for this employee’s wages.
California State Income Tax: For single filers, the 9.3% bracket applies to taxable income over $70,606. Here, after the $5,540 CA standard deduction (and $6,000 401(k)), the employee’s annual California taxable income is about $88,460. Computing the tax on $88,460 yields roughly $4,769/year, or $397.42/month withheld for state income tax.
California SDI/PFML: California imposes a 1.2% withholding on all wages (no cap). On $8,333.33 monthly wages, the SDI/PFL withholding is $100.00 per month.
Thus, the monthly payroll calculation is as follows:
| Withholding (Employee) | Amount |
| Federal income tax | $1,024.41 |
| Social Security tax (6.2%) | $516.67 |
| Medicare tax (1.45%) | $120.83 |
| California state income tax (approximate) | $397.42 |
| California SDI/PFL (1.2%) | $100.00 |
| 401(k) contribution (pre-tax) | $500.00 |
| Total employee deductions | $2,659.33 |
| Net take-home pay | $5,674.00 |
| Employer Tax | Amount |
| Social Security match (6.2%) | $516.67 |
| Medicare match (1.45%) | $120.83 |
| Federal Unemployment (FUTA, 0.6% net) | $3.50 |
| California Unemployment (SUTA, 3.4%) | $19.83 |
| Total employer taxes | $660.83 |
Now, as you can see, this is a lot of manual math for just one employee. Thus, it is always recommended to use automated payroll systems that calculate all this for you to ensure a smooth, headache-free process.
Andrew Lokenauth, fractional CFO and finance expert, echoes this sentiment:
“From handling $10M+ in annual payroll, I've developed a foolproof system. First, calculate gross wages. Then subtract pre-tax deductions like health insurance & 401k.
Next, apply the current tax rates—I use dedicated software now, but started with spreadsheets (big mistake). One manufacturing client saved $ 50K+ annually when I noticed they were overcalculating FICA on excluded benefits.
Pro tip: Use payroll software or the IRS withholding calculator. Manual math is asking for trouble.”
Essential Payroll Tax Forms And What They Do
Alongside your taxes, you also need to file the right forms with the right agencies, on time. Here's a breakdown of the core forms every employer needs to know, what they’re for, and when to file them.
1. Form W-2: Wage and tax statement
What it does: Reports wages paid and taxes withheld for each employee.
Who gets it: Employees, the Social Security Administration (SSA), and sometimes state tax agencies.
Due:
- To employees: By January 31
- To SSA (paper or e-file): By Jan 31
If you file late or file incorrectly, the penalty can be up to $310 per form, depending on how late you are.
2. Form W-3: Transmittal of wage and tax statements
What it does: A summary form that totals all W-2s being submitted to the SSA.
Who gets it: SSA (only when submitting paper W-2s).
Due: By Jan 31, same as W-2s.
3. Form 941: Employer’s quarterly federal tax return
What it does: Reports federal income tax withheld, plus Social Security and Medicare (FICA) taxes.
Who gets it: IRS
Due:
- Quarterly: April 30, July 31, Oct 31, Jan 31
- Even if no wages were paid that quarter, it still must be filed (unless you filed a final return).
If you’re a seasonal employer or hire infrequently, you can indicate that on the form to avoid unnecessary notices from the IRS.
4. Form 940: Employer’s annual federal unemployment (futa) tax return
What it does: Reports and pays FUTA tax, which funds federal unemployment benefits.
Who gets it: IRS
Due: Annually: By Jan 31
- You can deposit FUTA tax quarterly, but you only need to file once per year.
- If your total FUTA liability for the year is over $500, you must deposit it quarterly.
5. Form W-4: Employee’s withholding certificate
What it does: Used by employees to set federal income tax withholding amounts.
Who gets it: Employers keep it on file (not sent to IRS unless specifically requested).
Due: Upon hire, and whenever the employee updates it.
Tip: Always have a W-4 on file for each employee. If one isn’t submitted, you must withhold taxes as if the person were single with no adjustments.
6. State payroll tax forms
What they do: Varies by state. May include forms for income tax withholding, unemployment insurance, or disability programs (e.g., California DE 9/DE 9C for UI and SDI reporting).
Due: Usually quarterly or annually, depending on state rules.
Tip: Use your state’s employer tax portal or partner with a payroll provider who handles multi-state compliance.
7. Form 1099-NEC (if you hire contractors)
What it does: Reports payments of $600 or more made to independent contractors.
Due:
- To contractors: By January 31
- To IRS: By Jan 31 (paper or e-file)
What To Do If You’re Behind On Your Payroll Taxes
Falling behind on payroll taxes isn’t rare, but it can get serious fast. Whether it’s a cash flow crunch or oversight, the worst thing you can do is ignore it.
The IRS doesn’t just go after your business; in some cases, they’ll come after you personally.
So what should you do?
1. File everything, even if you can’t pay yet.
Don’t wait. The priority is to file all missing returns. Even if you don’t have the money right now, filing shows good faith and keeps penalties lower.
Lokenauth has gone through this ordeal, and here’s what he has to say:
“So this hits close to home. In my early consulting days, I inherited a client who hadn't paid payroll taxes for 6 months: about $175K behind.
First thing: File all missing returns immediately, even without payment. Then contact the IRS to set up an installment plan. They're pretty reasonable if you're proactive. We got them on a 24-month payment plan with minimal penalties.”
2. Get current, then get caught up
Don’t keep making the same mistake while trying to fix the old one. The IRS expects you to make current payroll deposits on time, even if you’re still paying off back taxes.
Raoul P.E. Schweicher, Managing Partner at MSadvisory, has over 8 years of experience in payroll management. He says:
“Make your current deposits on time so you're not digging a deeper hole. The penalty structure gets ugly fast: 2% for being 1–5 days late, jumps to 5% at 6 days, then 10% after 15 days. Miss an IRS notice by 10 days and you're looking at 15%.”
3. Set up a payment plan
If you’re upfront, the IRS will often allow a 24-month installment agreement for payroll tax debt.
This won’t wipe out penalties or interest, but it buys you time and protects you from enforced collections like levies or liens.
Schweicher adds:
“Payment plans are your friend if you can't pay everything at once—the IRS would rather get paid than chase you around. You can usually get 24 months for business payroll taxes. First-time penalty abatement is often available if you've got a clean history.”
4. Know the risks if you don’t act
If payroll taxes go unpaid long enough, the IRS can assess the Trust Fund Recovery Penalty - 100% of the unpaid portion, assessed personally against owners, officers, or anyone who “willfully” failed to send in the funds.
5. Get professional help early
Tax attorneys and payroll tax resolution specialists understand the system and can often negotiate better terms, reduce penalties, or even secure first-time abatement. Don’t wait until it spirals.
Common Payroll Tax Mistakes To Avoid
A few missteps can lead to significant problems. Here's what to watch out for:
- Late payments. Timeliness is key. Late payments are met with fees that increase the longer the payment is past due.
- Misclassification of employees. Freelancer or full-time? Your employee's classification affects their tax bracket, so ensure you get this right. According to Lokenauth, “Last March, one of my startup clients almost got hit with a $25K penalty because they misclassified contractors as employees. The thing is, classification issues are super common—I see them in about 30% of new clients.”
- Using outdated tax rates and tables. Using outdated tax rates, tables, or forms can result in incorrect calculations of payroll taxes. Always use the most current tax rates and tables provided by the IRS to ensure accuracy.
- Failure to account for taxable benefits. Forgetting to include taxable fringe benefits, such as bonuses, commissions, or non-cash compensation, in payroll calculations can lead to underreporting of income and underpayment of taxes.
- Overlooking employee withholding allowances. Neglecting to account for employee withholding allowances (essentially exceptions) or changes in filing status specified on Form W-4 can lead to incorrect federal income tax withholding amounts.
- Inaccurate calculation of overtime pay. Incorrectly calculating overtime pay rates for non-exempt employees can result in underpayment of wages and payroll taxes. Follow federal and state overtime pay rules and calculate overtime wages accurately.
- Failing to properly handle contractor tax forms: Mismanaging forms like Form 1096 and Form 1099 for U.S. contractors can lead to compliance issues and penalties. Ensure these forms are filed accurately and on time.
Avoiding common payroll tax mistakes is key to preventing legal issues. Tools like advanced tax software can help ensure compliance and accuracy in your payroll processes.
The Importance Of Being Diligent
Managing payroll taxes is a significant responsibility for employers. With potential legal and financial implications, it's vital to approach the task with diligence and accuracy.
By understanding the components, understanding which expenses the business can deduct, utilizing the right tools, and staying informed, you can ensure your business stays compliant and financially sound.
Further handy resources to help you manage a smooth payroll process:
- Payroll Benefits: A Comprehensive Guide
- Demystifying Payroll Deductions: Tips for Newbies and Seasoned Pros
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