Every U.S. employer has to withhold federal income tax, Social Security, and Medicare from employee paychecks, match the FICA portion out of the business’s own funds, deposit those amounts electronically on the schedule the IRS assigns, and reconcile everything on quarterly and annual returns. For 2026, Social Security tax applies to the first $184,500 of each employee’s wages, and the combined employer-employee FICA rate is 15.3% on most earnings.1Social Security Administration. Contribution and Benefit Base Getting payroll tax withholding wrong exposes the business to layered penalties, and in some cases the people running the company can be held personally liable for 100% of the unpaid tax.
What You Withhold From Each Paycheck
Two things come out of every paycheck: federal income tax and FICA.
Federal income tax withholding is driven by the employee’s Form W-4 and the withholding tables in IRS Publication 15 (Circular E). Publication 15 turns filing status, pay frequency, and wage amount into a specific dollar figure to withhold, and the IRS updates the tables whenever Congress changes brackets or the standard deduction, so the current-year version has to be used for every payroll run.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide Employees can update their W-4 at any time, and you adjust withholding based on the new form going forward.3Internal Revenue Service. About Form W-4, Employees Withholding Certificate
FICA is a fixed pair of rates. The employee’s share is 6.2% for Social Security and 1.45% for Medicare.4Office of the Law Revision Counsel. 26 U.S. Code 3101 – Rate of Tax You match that with 6.2% and 1.45% from the business, paid on top of the employee’s wages.5Office of the Law Revision Counsel. 26 U.S. Code 3111 – Rate of Tax Total FICA cost on each dollar of wages: 15.3%, split evenly.
The Social Security portion stops once an employee’s year-to-date wages hit the annual wage base. For 2026, that ceiling is $184,500.1Social Security Administration. Contribution and Benefit Base Above that, neither side owes the 6.2% for the rest of the year. Medicare has no cap; the 1.45% applies to every dollar.
There is a separate 0.9% Additional Medicare Tax on wages above $200,000 in a calendar year.4Office of the Law Revision Counsel. 26 U.S. Code 3101 – Rate of Tax Once an employee’s year-to-date wages cross $200,000, you begin withholding the extra 0.9% on wages above that line. There is no employer match. Tracking these thresholds across the year is on you, and errors in either direction create problems: over-withholding draws employee complaints, under-withholding leaves the business owing the shortfall.
Tips and Supplemental Wages
Two common variations trip up employers.
Tips count as wages for FICA. Employees who receive $20 or more in tips during a month must report them to you in writing, and once they do, you owe the employer share of Social Security and Medicare on those tips just like on regular wages.6Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions You also withhold the employee’s share of FICA and federal income tax from their other wages to cover the tip amounts. When reported tips plus regular wages aren’t enough to cover the full withholding, the employee may owe the difference at filing.
Supplemental wages (bonuses, commissions, overtime, severance) follow their own income tax withholding rules. Paid separately from regular wages, you can withhold federal income tax at a flat 22%.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide If an employee’s supplemental wages exceed $1 million in a calendar year, the excess is withheld at 37%. FICA treatment doesn’t change; the wage base and Medicare rules apply the same way regardless of whether a payment is called a bonus.
Federal Unemployment Tax (FUTA)
FUTA sits entirely on the employer. Employees contribute nothing. You owe FUTA if you paid $1,500 or more in wages during any calendar quarter, or if you had at least one employee for any part of a day in 20 or more different weeks during the year.7Office of the Law Revision Counsel. 26 U.S. Code Chapter 23 – Federal Unemployment Tax Act
The gross FUTA rate is 6% on the first $7,000 you pay each employee during the year. Wages above $7,000 per employee are not subject to FUTA. Most employers pay far less than 6% because of a credit for state unemployment taxes. If your state unemployment program meets federal standards and you pay your state taxes on time, you get a credit of up to 5.4%, dropping the effective FUTA rate to 0.6%. On the $7,000 wage base, that is $42 per employee per year.
The exception is credit reduction states. When a state borrows from the federal government to cover unemployment benefits and doesn’t repay the loan within two years, employers in that state lose part of the 5.4% credit. For 2026, California and the U.S. Virgin Islands entered the year with outstanding federal unemployment loan balances, putting employers there potentially in credit-reduction territory.8U.S. Department of Labor. Potential 2026 Federal Unemployment Tax Act (FUTA) Credit Reductions If the balances aren’t repaid by November 10, 2026, employers in those jurisdictions will see a higher FUTA cost on Form 940.
State unemployment insurance is separate from FUTA. Every state runs its own program with its own rate schedule and taxable wage base. Staying current on state payments is what preserves the federal credit.
How Often You Deposit Withheld Taxes
Everything you withhold, plus the employer match, has to be deposited electronically through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay for businesses, or the IRS business tax account.9Internal Revenue Service. Topic No. 757, Forms 941 and 944 – Deposit Requirements Paper checks are not an option.
Deposit frequency depends on your lookback period, which is the 12 months from July 1 two years back through June 30 of the prior year. For 2026, the lookback runs July 1, 2024, through June 30, 2025.
- If you reported $50,000 or less in employment taxes during the lookback period, you deposit monthly. Taxes accumulated during a calendar month are due by the 15th of the following month.
- If your lookback taxes exceeded $50,000, you deposit semi-weekly. Taxes on wages paid Wednesday through Friday are due the following Wednesday. Taxes on wages paid Saturday through Tuesday are due the following Friday.
- If you accumulate $100,000 or more in taxes on any single day, you must deposit the entire amount by the next business day, whatever your normal schedule.10Internal Revenue Service. Employment Tax Due Dates
Missing a deposit deadline triggers a tiered penalty: 2% for deposits one to five days late, 5% for six to fifteen days late, 10% for more than fifteen days late, and 15% if the tax is still unpaid ten days after the IRS sends its first notice.11Internal Revenue Service. Failure to Deposit Penalty The percentages don’t stack. A deposit 20 days late costs 10%, not 17%.
Quarterly and Annual Reporting
Depositing the money is half the job. You also file returns that reconcile what you deposited against what you owed.
Form 941, the Employer’s Quarterly Federal Tax Return, reports total wages paid, federal income tax withheld, and both shares of FICA.12Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return It’s due by the last day of the month following each quarter: April 30, July 31, October 31, and January 31. Once you file your first 941, you keep filing every quarter even in zero-wage quarters, unless you file a final return or request a change.
Very small employers with total annual employment tax liability of $1,000 or less can request permission to file Form 944 once a year instead. You have to call or write the IRS between January 1 and early April of the tax year, and you need written confirmation before switching.13Internal Revenue Service. Instructions for Form 941 – Section: Who Must File Form 941?
At year end, issue a Form W-2 to each employee and file copies with the Social Security Administration. For the 2026 tax year, both paper and electronic W-2 filings are due to the SSA by February 1, 2027.14Internal Revenue Service. General Instructions for Forms W-2 and W-3 Late or incorrect W-2 filings carry per-form penalties that grow the longer you wait.
Failing to file Form 941 on time is a separate problem from failing to deposit. The late-filing penalty is 5% of the unpaid tax for each month the return is late, up to 25%.15Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax That runs on top of any deposit penalties.
Personal Liability for Unpaid Payroll Taxes
Payroll taxes differ from almost every other business obligation in one important way. When a business fails to turn over withheld income tax and FICA, the IRS can reach past the company and collect from the individuals who were responsible. The trust fund recovery penalty under IRC 6672 imposes personal liability equal to 100% of the unpaid trust fund taxes, meaning the full amount of income tax, Social Security, and Medicare that should have been withheld and paid over.16Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
A “responsible person” is anyone with authority to decide which creditors got paid who chose to pay other bills instead of forwarding payroll taxes. That commonly includes owners, corporate officers, and bookkeepers with check-signing authority, and can extend to anyone with financial control. The IRS only has to show the failure was willful, and willful doesn’t require intent to defraud. Knowingly using payroll tax money to cover rent or vendor invoices is enough.
The criminal side is more severe. Willfully failing to collect and pay over employment taxes is a felony punishable by up to five years in prison and a fine of up to $10,000.17Office of the Law Revision Counsel. 26 U.S. Code 7202 – Willful Failure to Collect or Pay Over Tax Prosecutions are relatively rare, but the IRS pursues them in cases involving repeated noncompliance or large balances.
Is the Worker Actually an Employee?
Withholding rules apply only to employees. If you classify someone as an independent contractor when they are really an employee, you owe every tax you should have withheld, plus penalties and interest. The IRS weighs behavioral control, financial control, and the type of relationship, and no single factor decides the question.18Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? If you can’t tell, either party can file Form SS-8 to request an official determination.19Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Businesses that have treated workers as contractors in good faith may qualify for Section 530 safe-harbor relief if they filed all required 1099s, never treated a similar worker as an employee, and had a reasonable basis for the classification.20Internal Revenue Service. Worker Reclassification – Section 530 Relief
Setting Up Before the First Paycheck
Before issuing a paycheck, a business needs an Employer Identification Number from the IRS. Most employers get one instantly through the online application or by mailing Form SS-4.
Two federal forms have to be completed for each new hire. Form W-4 captures filing status, multiple-job status, and any credit or deduction adjustments, all of which feed into how much federal income tax you withhold.21Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Form I-9 verifies identity and work authorization.22U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification Section 2 of the I-9, where you examine the employee’s original documents and sign the employer attestation, has to be completed within three business days of the employee’s first day of work for pay.23U.S. Citizenship and Immigration Services. Completing Section 2, Employer Review and Attestation
Federal law also requires every new hire to be reported to your state’s new-hire directory within 20 days of the hire date.24Office of the Law Revision Counsel. 42 U.S. Code 653a – State Directory of New Hires The requirement supports child support enforcement, and states may impose shorter deadlines or specific reporting methods.
What to Keep and for How Long
Federal regulations require you to keep employment tax records for at least four years after the tax is due or paid, whichever comes later.25eCFR. 26 CFR 31.6001-1 – Records in General At minimum, records need to show each employee’s name, address, Social Security number, the amounts and dates of all wage payments, the tax amounts withheld, and any non-cash compensation. Gaps in documentation are gaps in your defense if the IRS audits.
Form I-9 has its own retention rule. Keep each employee’s I-9 for three years after the date of hire or one year after the employee stops working for you, whichever is later.26U.S. Citizenship and Immigration Services. 10.0 Retaining Form I-9 For short-tenured employees, the three-year-from-hire rule usually controls. For long-tenured employees, the one-year-after-separation rule kicks in. Destroying I-9s too early exposes the business to fines in an immigration audit.