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Employer Payroll Taxes: A Guide for Small Businesses
Organizations must understand and comply with all legalities surrounding payroll taxes. Here's what you need to know.
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You’ve taken the time to write a business plan, streamline daily operations and staff your business with a reliable team. However, to run a truly successful organization, you must also stay on top of payroll tax reporting and deposits. We’ll explain how payroll taxes work and how to comply with federal and state requirements, so you can file payroll taxes accurately, avoid penalties and keep your business running smoothly.
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What are payroll taxes?
Payroll taxes are the taxes you remit to the IRS and state agencies based on your employees’ wages or salaries.
Some payroll taxes are paid solely by you, the employer, while others are withheld from your employees’ paychecks. For example, employers typically pay half of the FICA tax (Social Security and Medicare) — 7.65 percent of each employee’s wages. You then withhold the remaining 7.65 percent from employee pay and submit the full 15.3 percent FICA tax to the IRS.
What are mandatory and discretionary payroll tax responsibilities?
As an employer, you are responsible for both mandatory and discretionary payroll tax-related duties, depending on your business structure, location and employee benefits.
Mandatory payroll tax responsibilities include:
- Federal and state income tax withholding from employee pay (and remittance to the IRS)
- Quarterly reports of income tax withholding and federal payroll tax
- Annual reporting of Social Security and employee tax payments on Forms W-3 and W-2.
- Federal and state unemployment tax — the Federal Unemployment Tax Act (FUTA) tax and State Unemployment Tax Act (SUTA) tax
- State and local-level reporting
Discretionary or situational payroll tax responsibilities may include:
- Managing deductions for 401(k) retirement plans or other employer-sponsored retirement contributions
- Withholding for flexible spending accounts (FSAs, such as dependent care FSAs) or health savings accounts (HSAs)
- Processing wage garnishments, such as child support or tax levies
- Deductions for union dues, where applicable
- Collecting local transit taxes or other special local assessments, depending on your jurisdiction
What to consider when calculating employer payroll taxes
When calculating payroll taxes, employers must account for their workers, wages and federal, state and local tax obligations:
- Taxable workers: Employees are subject to payroll tax withholding and employer-paid taxes. Independent contractors, however, pay their own taxes and are not included in employer payroll tax calculations.
- Taxable wages: Taxable wages include salary, employee bonuses, commissions and non-cash gifts, such as gift cards.
- Withholding and employer-paid requirements: Payroll taxes generally include federal, state and local taxes. The primary federal payroll tax employers must pay is the FICA (Federal Insurance Contributions Act) tax, which covers Social Security and Medicare.
Here are the basic employer-paid payroll taxes, in detail.
FICA tax
FICA is the combined federal payroll tax covering Social Security and Medicare. As an employer, you must match the amount withheld from your employees’ pay. This means employers and employees each pay 7.65 percent, for a total of 15.3 percent:
- Social Security: You and your employee each pay a 6.2 percent Social Security tax on the employee’s gross taxable wages. (The 2025 Social Security wage base is $176,100.)
- Medicare: You and your employee each pay a 1.45 percent Medicare tax on all wages. There is no income cap for Medicare tax. Once an employee earns more than $200,000 in a calendar year, they must also pay an additional 0.9 percent Medicare tax.
Federal and state unemployment taxes
Employers must pay both federal and state unemployment taxes, which fund unemployment benefits for eligible workers.
- FUTA: The FUTA rate is 6 percent on the first $7,000 of each employee’s wages. However, most employers receive a credit of up to 5.4 percent if they pay their state unemployment taxes on time, effectively reducing the FUTA tax rate to 0.6 percent.
- SUTA: SUTA rates vary by state and employer. States may charge additional fees for job training programs or administrative costs and your specific SUTA rate is often based on your business’s industry, size and history of unemployment claims.
How to calculate, pay and manage payroll taxes
Here’s a brief rundown of how employers calculate, pay and manage their payroll taxes.
How to calculate employer payroll taxes
Calculating employer payroll taxes may seem complex, but it’s a straightforward process. Here’s how to get started.
Identify your taxable employees and wages.
Ensure you classify workers correctly (not as independent contractors) and calculate taxes based on gross wages, as described above.
Calculate your share of FICA taxes.
You’ll pay 6.2 percent for Social Security (on wages up to $176,100 in 2025) and 1.45 percent for Medicare on all wages. That’s 7.65 percent total per employee. You’ll also need to withhold the same amount from employee paychecks.
Factor in FUTA and SUTA unemployment taxes.
- FUTA: FUTA is generally 6 percent on the first $7,000 of each employee’s wages — but most employers qualify for a 5.4 percent credit, reducing the effective rate to 0.6 percent.
- SUTA: SUTA rates vary by state and employer history, so check with your state agency.
Add any state or local payroll taxes.
Some states and cities require additional payroll taxes, such as disability insurance or transit taxes. If these apply to your business, be sure to account for them.
How to pay and manage payroll taxes
Payroll taxes can be complex and time-consuming. Some states and special situations can be even more demanding and the consequences of missing crucial deadlines or deposits are significant. You could file paper forms and meet all the deadlines yourself or you can get help, online or in person:
- Payroll software: Dr. John G. Adams, CPA and tax planning expert, suggests payroll software as an option for the do-it-yourselfer. “It is the most affordable method,” Adams explained. “However, it is the one that costs you the most of your time and if you are not an expert, it can lead to more errors.”
- Bookkeeper: Another option is hiring a bookkeeper and paying them to run payroll and perform other financial accounting tasks. “The downside may be that they are busy handling multiple tasks beyond just your payroll,” Adams cautioned. You may still need to purchase payroll software for your bookkeeper to use.
- Payroll provider: The most surefire way to file timely and accurate payroll taxes is to work with one of the best online payroll services. “A dedicated payroll provider will be highly knowledgeable about all things payroll,” said Adams. “The downside is that they could be more expensive.” Still, the more employees you have, the more it makes sense to have a payroll provider. As a bonus, modern payroll software can help you calculate tax liabilities, schedule EFTPS payments and automatically generate forms like 941, W-2 and 940.
Adams believes the penalties and headaches that can come from payroll errors far outweigh the price of a good payroll service. “I have had many do-it-yourself business owners who have had to deal with correcting errors with the reporting agencies and say they will never do their own payroll again.”
Payroll tax FAQs
| Form | Purpose | Due dates |
|---|---|---|
| Form 941 | Employer's Quarterly Federal Tax Return Use Form 941 to report quarterly payroll taxes, including withheld income tax, Social Security and Medicare. It also covers sick pay withholding and supplemental unemployment benefits. | April 30, July 31, October 31 and January 31 |
| Form 943 | Employer's Annual Federal Tax Return for Agricultural Employees Use this form to report agricultural wages and federal income and FICA tax for farmworkers. | January 31 |
| Form 944 | Employer's Annual Federal Tax Return This form is for small employers whose annual payroll tax liability is $1,000 or less. It replaces Form 941 for eligible businesses. | January 31 |
| Form 945 | Annual Return of Withheld Federal Income Tax Used to report non-payroll income tax withholding, such as backup withholding on interest, dividends or gambling winnings. | January 31 |
| Form W-2 | Wage and Tax Statement Reports employee wages, tips and other compensation, along with withheld taxes. A copy is sent to both the employee and the IRS. | January 31 |
| Form W-3 | Transmittal of Wage and Tax Statements Summarizes W-2 forms and is submitted to the Social Security Administration. | January 31 |
| Form 940 | Employer's Annual FUTA Tax Return Used to report your annual FUTA tax, which is paid only by the employer. | January 31 |
- Monthly deposits: Monthly deposits are made by the 15th day of the following month. For example, all April employment taxes must be paid by May 15.
- Semiweekly deposits: If you pay employees on Wednesday, Thursday or Friday, your deposit is due by the following Wednesday. If you pay employees on Saturday, Sunday, Monday or Tuesday, your deposit is due by the following Friday.
- FUTA deposits: FUTA tax (Form 940) deposits are required quarterly for tax amounts over $500. You must deposit the FUTA tax by the end of the month, directly after the quarter ends. For example, FUTA tax for Q1 (January–March) is due by April 30.
- If you're paid as an employee: If your small business is incorporated, such as an S corporation or C corporation, and you pay yourself as an employee, you're generally required to pay federal, state, local and FICA taxes and file payroll reports, just as you would for any employee.
- If you file as a sole proprietor: If you operate as a sole proprietor or single-member limited liability company, you do not need to file payroll tax forms or make payroll tax deposits. Instead, you'll report your business income and expenses on Schedule C, which you file as part of your Form 1040. You may be required to make quarterly estimated tax payments to avoid IRS underpayment penalties.
| Form | Purpose | Notes |
|---|---|---|
| Form 1040-ES | Estimated Tax for Individuals | It helps you estimate and pay income and self-employment taxes quarterly. It includes vouchers for mailing payments or you can pay online via EFTPS. |
| Schedule C | Profit or Loss From Business | It reports your business income and expenses. Filed as part of your annual Form 1040. |
| Schedule SE, Self-Employment Tax | Self-Employment Tax | This form calculates Social Security and Medicare taxes for self-employed individuals. You pay both portions of FICA: 15.3 percent total (12.4 percent for Social Security and 2.9 percent for Medicare). |
- If you file as self-employed, you pay Social Security tax on income up to $176,100 annually (2025).
- After you meet that threshold, you no longer owe money in Social Security taxes for the rest of the year.
- You continue to pay Medicare tax; once you reach the wage threshold of $200,000 (in 2025), regardless of filing status, you must pay an additional 0.9 percent in Medicare taxes.
January is the busiest month for payroll taxes. Consider scheduling time before the end of the year to gather documents and complete all required forms. Even if you work with an accountant or payroll provider, it's your responsibility to ensure they have all the information needed to meet filing deadlines.
Here are the key payroll tax deadlines for a typical calendar year:
- 15th of every month:
- Monthly FICA and income tax deposits (for monthly depositors)
- January 31:
- Q4 Form 941 filing (or Form 944 if you're an annual filer)
- Annual FUTA return (Form 940)
- Year-end W-2 and W-3 filings to the IRS/SSA
- Q4 unemployment tax deposit
- April 30:
- Q1 Form 941 filing
- Q1 unemployment tax deposit
- July 31:
- Q2 Form 941 filing
- Q2 unemployment tax deposit
- October 31:
- Q3 Form 941 filing
- Q3 unemployment tax deposit
If a payroll tax deadline falls on a weekend or federal holiday, the due date is extended to the next business day.
Julie Thompson contributed to this article.
