Yes. Employers are required to withhold federal taxes from employee wages. Federal law directs every employer paying wages to deduct federal income tax, Social Security tax, and Medicare tax from each paycheck, deposit that money with the U.S. Treasury, and pay a matching share of Social Security and Medicare plus federal unemployment tax from the business’s own funds.1Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source
Federal Income Tax
The amount of income tax you withhold from each paycheck is driven by the employee’s Form W-4 and by IRS withholding tables. The W-4 tells you the employee’s filing status and any adjustments for dependents, other income, or extra withholding. Those entries feed into the tables and computational procedures the IRS publishes, which produce a specific dollar figure per pay period.1Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source
If an employee never turns in a W-4, you don’t get to stop withholding. You withhold at the default rate, which treats the worker as a single filer with no adjustments. That usually withholds more than the employee would have chosen.
An employee who owed no federal income tax last year and expects to owe none this year can claim exempt on the W-4, and you withhold no federal income tax at all. The exemption expires at year-end. To keep it going, the employee has to submit a new W-4 by February 15.2Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate
Bonuses, Commissions, and Other Supplemental Wages
Supplemental wages follow a different rule. When bonuses, commissions, overtime pay, and similar payments are identified separately from regular wages, you can apply a flat 22% federal income tax withholding rate instead of running them through the W-4 calculation. Once an employee’s supplemental wages cross $1 million in a calendar year, a mandatory 37% rate applies to the amount above that threshold.3Internal Revenue Service. Publication 15-A (2026), Employers Supplemental Tax Guide
Social Security and Medicare
The Federal Insurance Contributions Act requires you to withhold Social Security and Medicare taxes separately from income tax. Social Security is 6.2% on wages up to $184,500 in 2026. Once an employee crosses that cap, you stop withholding Social Security for the rest of the year. Medicare is 1.45% on every dollar, with no cap.4Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax5Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
You then owe the same amounts from the business. Under 26 U.S.C. § 3111, the employer pays 6.2% for Social Security and 1.45% for Medicare on the same wages. Combined, FICA runs 15.3% of every dollar an employee earns up to the Social Security wage cap.6Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax
There’s one more piece. Once an employee’s wages pass $200,000 in a calendar year, you must begin withholding an Additional Medicare Tax of 0.9% on the amount above that threshold, regardless of the employee’s filing status. The employer does not match this extra 0.9%; it comes entirely from the employee.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Federal Unemployment Tax
FUTA is different. It is entirely the employer’s obligation, and nothing comes out of the employee’s paycheck for it. The rate is 6.0% on the first $7,000 of wages paid to each employee per year. Employers who pay their state unemployment taxes on time receive a credit of up to 5.4%, which drops the effective FUTA rate to 0.6% per employee in most cases.8U.S. Department of Labor. FUTA Credit Reductions
FUTA is reported annually on Form 940, due January 31 of the following year. If you deposited all FUTA tax on time throughout the year, you get until February 10.9Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment Tax Return
Which Workers Actually Trigger Withholding
These rules apply to employees. Independent contractors handle their own tax payments, and you don’t withhold anything from what you pay them. Getting the classification wrong is expensive: the business can owe the taxes it should have withheld, plus interest and penalties.10Office of the Law Revision Counsel. 26 USC 3121 – Definitions
The IRS applies a common-law control test with three categories. Behavioral control asks whether the company dictates how, when, and where the work happens. Financial control looks at who provides the tools, whether the worker can take a profit or loss, and how the worker is paid. The type of relationship rounds it out: written contract, benefits, and whether the arrangement is expected to be permanent. No single factor decides the question; the IRS weighs them together.
Onboarding Paperwork
Before you can calculate any withholding, you need a completed Form W-4 from the employee, on or before the first day of work. It carries the Social Security number and filing status that drive every paycheck calculation from there on.11eCFR. 26 CFR 31.3402(f)(2)-1 – Furnishing of Withholding Allowance Certificates
You’ll also complete Form I-9 to verify the person is authorized to work in the United States. That one is an immigration compliance requirement, separate from tax law, but it belongs in the same onboarding file.
Employment tax records, including W-4s, payroll records, deposit receipts, and filed returns, must be kept at least four years after the tax is due or paid, whichever is later.12Internal Revenue Service. How Long Should I Keep Records
Depositing the Money You Withhold
Withholding is only half of it. You then have to deposit the funds with the federal government through the Electronic Federal Tax Payment System or another approved electronic method. From the moment you withhold, that money belongs to the U.S. Treasury; you’re holding it in trust.13Internal Revenue Service. Depositing and Reporting Employment Taxes
How fast you deposit depends on the size of your payroll. The IRS puts you on one of two schedules based on a lookback period. If your total tax liability during that period was $50,000 or less, you’re monthly. If it was more, you’re semiweekly, and deposits are due within a few days of each payday.14Internal Revenue Service. Notice 931 (Rev. September 2025)
Late deposits carry escalating penalties under 26 U.S.C. § 6656:
- 1 to 5 days late: 2% of the unpaid amount
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- Still unpaid 10 days after an IRS delinquency notice: 15%
Interest runs on top of these penalties.15Office of the Law Revision Counsel. 26 USC 6656 – Failure to Make Deposit of Taxes
Quarterly and Year-End Reporting
Most employers file Form 941 each quarter, reporting total wages paid, federal income tax withheld, and both shares of Social Security and Medicare. The IRS uses those filings to reconcile what you reported against the deposits you actually made.16Internal Revenue Service. Instructions for Form 941 (Rev. March 2026)
At year-end, you furnish each employee a Form W-2 showing total wages and taxes withheld, and file copies of the W-2s with a transmittal Form W-3 with the Social Security Administration. For the 2026 tax year, the filing deadline is February 1, 2027, whether you file on paper or electronically. If you’re required to file 10 or more information returns during the calendar year, you must file them electronically.17Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
Personal Liability if Withheld Taxes Don’t Reach the IRS
This is the part that catches business owners off guard. Withheld income tax and FICA are trust fund taxes. If the business fails to send that money in, the IRS can come after the individuals responsible, not just the company.
Under 26 U.S.C. § 6672, any person responsible for collecting and paying over employment taxes who willfully fails to do so faces a penalty equal to 100% of the unpaid tax. The IRS calls it the Trust Fund Recovery Penalty. It reaches owners, officers, and even bookkeepers or accountants who had authority over which bills got paid. “Willfully” doesn’t mean intent to cheat the government; it’s enough that you knew the taxes were due and paid other creditors instead. Once assessed, the penalty is a personal debt that follows the individual. Bankruptcy, dissolution, or selling the company doesn’t erase it.18Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
State Withholding Is a Separate Obligation
Federal withholding is not the whole picture. Most states impose their own income tax withholding, with top marginal rates ranging from zero in states with no income tax to over 13% in the highest-tax states. Forms, deposit schedules, and filing deadlines vary. If you have employees working in more than one state, you may need to register and withhold in each of them. State unemployment insurance is a separate employer obligation in every state, with new-employer rates and wage bases that differ significantly across jurisdictions.