Payroll tax laws require every U.S. employer to withhold specific taxes from employee paychecks, match some of them out of company funds, deposit the money on a set schedule, and file returns that reconcile the year. The federal core is FICA at a combined 15.3% (split evenly between employer and employee), federal unemployment tax paid entirely by the employer, and federal income tax withholding based on each worker’s Form W-4. State unemployment tax and, in most states, state income tax withholding sit on top. Miss a deposit and penalties escalate within days; fail to hand over the amounts withheld from employees and the IRS can collect the full balance personally from the owner.
What Employers Withhold and Match
The Federal Insurance Contributions Act funds Social Security and Medicare through matching contributions. Each side pays 6.2% for Social Security and 1.45% for Medicare, so the employer’s cost is 7.65% of covered wages and another 7.65% comes out of the employee’s check.1Social Security Administration. FICA and SECA Tax Rates These rates have not changed since 1990.
Social Security tax only applies up to an annual wage base. For 2026 that ceiling is $184,500, and once an employee crosses it neither side owes any more Social Security tax for the rest of the year.2Social Security Administration. Contribution and Benefit Base Medicare has no cap. The 1.45% rate applies to every dollar of wages.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
An Additional Medicare Tax of 0.9% applies to wages over $200,000 in a calendar year. The employer does not match this piece but must still withhold it once wages cross the $200,000 line, regardless of the employee’s filing status. Married couples filing jointly actually owe the additional tax starting at $250,000 of combined wages, and the employee reconciles any difference on their return.4Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
On top of FICA, the employer withholds federal income tax at the amount indicated by each employee’s Form W-4.5Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Wages for these purposes include more than base pay: commissions, bonuses, tips, and most fringe benefits carry the same payroll tax liability.
Federal Unemployment Tax (FUTA)
The Federal Unemployment Tax Act imposes a 6.0% tax on the first $7,000 of each employee’s annual wages. FUTA is entirely an employer tax; nothing is withheld from the employee.6Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return Most employers pay far less than the headline rate because timely state unemployment contributions generate a credit of up to 5.4%, dropping the effective FUTA rate to 0.6% — a maximum of $42 per employee per year.7U.S. Department of Labor. Unemployment Insurance Tax Topic
Employers in states with outstanding federal unemployment loans, or states that have not met certain federal requirements, may lose part of that credit and owe a higher effective rate. The IRS notifies affected employers before the annual Form 940 deadline.
State Unemployment and State Income Tax
Every state runs its own unemployment insurance program, and the numbers vary widely. State taxable wage bases range from $7,000 in some states to over $60,000 in others. The rate assigned to any individual employer depends on its experience with former workers filing claims: stable workforces pay less, high-turnover employers pay more. A brand-new employer typically starts at a standard rate (often around 2.7%) until it has enough claims history for the state to assign a permanent rate.7U.S. Department of Labor. Unemployment Insurance Tax Topic
Most states also require employers to withhold state income tax. The amount depends on where the employee lives, where the work is performed, and the state’s own brackets. Some cities and special districts add local income taxes, transit assessments, or school district levies. Employers with workers in more than one jurisdiction have to track each set of rules separately.
When an employee lives in one state and works in another, reciprocity agreements between neighboring states can simplify things by letting the employer withhold only for the home state. Without such an agreement, the employee may owe tax in both states and claim a credit at home for tax paid to the work state. Remote work has added a further wrinkle: hiring someone in another state generally creates a tax presence there, obligating the employer to register with that state’s tax and unemployment agencies. A handful of states, including New York, Connecticut, Pennsylvania, Delaware, Nebraska, Massachusetts, and Arkansas, apply a “convenience of the employer” rule that can tax remote workers based on where the employer’s office sits.
Deposit Schedules and Federal Returns
Employers report federal income tax withholding along with Social Security and Medicare taxes on Form 941 each quarter. The returns are due April 30, July 31, October 31, and January 31.8Internal Revenue Service. Employment Tax Due Dates FUTA is reconciled annually on Form 940.6Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return Every federal deposit goes through the Electronic Federal Tax Payment System.9Internal Revenue Service. EFTPS The Electronic Federal Tax Payment System
The IRS puts employers on one of two deposit schedules based on a lookback period. For Form 941 filers, the lookback covers four quarters running from July 1 of the second preceding year through June 30 of the prior year. If total taxes during that window were $50,000 or less, the employer deposits monthly: taxes on wages paid in a given month are due by the 15th of the following month.10Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide Above $50,000, the employer moves to a semi-weekly schedule tied to actual paydays. One more rule cuts across both: if undeposited taxes hit $100,000 on any single day, the deposit is due the next business day.8Internal Revenue Service. Employment Tax Due Dates
Employers also owe Form W-2 to every employee by January 31 for the prior calendar year. When that date falls on a weekend or holiday, the deadline moves to the next business day.11Internal Revenue Service. Filing Forms W-2 and W-3
Late Deposit Penalties
Missing a deposit deadline sets off a tiered penalty on the amount that should have been deposited:
- 1 to 5 days late: 2%
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- Not deposited within 10 days of the first IRS delinquency notice: 15%
The penalty applies to the unpaid deposit amount, not the full quarter’s liability.12Office of the Law Revision Counsel. 26 US Code 6656 – Failure to Make Deposit of Taxes The jump from 10% to 15% after an IRS notice is where many small businesses land in serious trouble, because by that point interest has been accruing and the IRS is actively pursuing collection.
Personal Liability for Withheld Amounts
The single biggest exposure in payroll tax law is the Trust Fund Recovery Penalty. When an employer withholds Social Security, Medicare, and income tax from an employee’s check, that money is held in trust for the government. It was never the company’s money to spend. If it does not get deposited, the IRS can assess the full unpaid amount personally against any individual who was responsible for paying it over and willfully failed to do so.13Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
The penalty equals the entire balance of unpaid trust fund taxes. It is not a percentage on top. The IRS can file federal tax liens and seize personal assets to collect. A “responsible person” under this rule covers anyone with authority to decide which bills get paid: owners, officers, bookkeepers with check-signing authority, and some managers.14Internal Revenue Service. Trust Fund Recovery Penalty (TFRP) Overview and Authority The penalty can be assessed against more than one of them for the same unpaid taxes.
The willfulness bar is lower than most business owners assume. The IRS does not have to prove a scheme or evil intent. If the owner knew payroll taxes were unpaid and chose instead to pay rent, suppliers, or a loan, that is treated as willful. Using available cash to keep the doors open while letting deposits slide is exactly the pattern the rule targets.13Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
Beyond the civil penalty, willfully failing to collect or pay over payroll taxes is a federal felony. A conviction carries a fine of up to $10,000, up to five years in prison, or both.15Office of the Law Revision Counsel. 26 USC 7202 – Willful Failure to Collect or Pay Over Tax Criminal prosecution is less common than civil enforcement, but the IRS does bring cases, especially where an employer withheld from paychecks and diverted the money for personal use over an extended period.
Worker Misclassification
Treating an employee as an independent contractor does not make payroll tax obligations go away. When the IRS reclassifies a worker, Section 3509 sets a reduced liability of 1.5% of wages for the income tax withholding portion and 20% of the employee’s Social Security tax that should have been collected.16Office of the Law Revision Counsel. 26 US Code 3509 – Determination of Employers Liability for Certain Employment Taxes Those reduced rates only apply if the employer actually filed the required information returns (typically 1099s) for the workers. Skip the 1099s and the numbers double: 3% for withholding and 40% for the Social Security share.
The Section 3509 relief does not apply at all when the misclassification was intentional. In that situation the employer owes the full amount of every employment tax that should have been withheld and matched, plus interest running from the original due dates.
How Long to Keep Records
The IRS requires employers to keep all employment tax records for at least four years after the tax becomes due or is paid, whichever is later. That covers filed Forms 941, 940, and W-2; proof of EFTPS deposits; and employee data including names, addresses, Social Security numbers, and withholding elections.17Internal Revenue Service. Employment Tax Recordkeeping
The Fair Labor Standards Act adds its own layer: payroll records including hours worked and wage rates must be kept at least three years, and wage calculation records like time cards for at least two.18U.S. Department of Labor. Fact Sheet 21 – Recordkeeping Requirements Under the Fair Labor Standards Act Holding everything for four years satisfies both agencies and leaves a buffer if an audit reaches back further than expected.