Employer payroll tax obligations in the United States come down to four moving parts: withholding federal income tax and the employee’s share of Social Security and Medicare from each paycheck, matching the Social Security and Medicare portions from company funds, paying federal unemployment tax on top, and depositing and reporting all of it on the IRS’s schedule. The IRS calls the withheld amounts “trust fund taxes” because you hold employee money in trust until you deposit it.1Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP) Miss a deposit and penalties escalate by the week. Fail to pay over withheld taxes and the IRS can come after you personally, even if the business is an LLC or corporation.
The Federal Taxes You Owe on Payroll
Three federal payroll taxes apply to almost every employer: FICA, an Additional Medicare Tax for higher earners, and FUTA. Each has its own rate, wage base, and split between employer and employee.
Social Security and Medicare (FICA)
The Federal Insurance Contributions Act imposes a 6.2% Social Security tax on both the employer and the employee, for a combined 12.4%. In 2026, this tax applies only to the first $184,500 of each employee’s wages.2Social Security Administration. Contribution and Benefit Base Once an employee’s year-to-date earnings cross that threshold, you stop withholding Social Security tax for the rest of the calendar year, and your employer match stops too.
Medicare works differently. Both the employer and employee pay 1.45%, for a combined 2.9%, with no wage cap. Every dollar of wages is subject to Medicare tax regardless of how much the employee earns.3Office of the Law Revision Counsel. 26 USC Ch 21 – Federal Insurance Contributions Act
Additional Medicare Tax
When an employee’s wages from your company exceed $200,000 in a calendar year, you start withholding an extra 0.9% Medicare tax on every dollar above that line. This is the employee’s obligation alone; there is no employer match.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax The $200,000 trigger is per-employer and does not account for the employee’s filing status or wages from other jobs. Any difference between what you withheld and what the employee actually owes gets settled on their tax return.
Federal Unemployment Tax (FUTA)
FUTA is entirely on the employer. The tax rate is 6.0% on the first $7,000 of each employee’s annual wages, and employees pay nothing toward it. Most employers qualify for a credit of up to 5.4% for state unemployment taxes already paid, which brings the effective federal rate down to 0.6%, or $42 per employee per year.5Internal Revenue Service. Topic No 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements The credit can be lower if your state has outstanding federal unemployment loans.
Federal Income Tax Withholding
You also withhold federal income tax from each paycheck based on the employee’s Form W-4 elections. The calculation is not a flat rate. IRS Publication 15-T provides both a percentage method and wage bracket tables, and you use them each pay period based on how the employee filled out their W-4.6Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
Employee or Independent Contractor
None of the above applies to true independent contractors. You do not withhold their taxes, do not match FICA, and do not pay FUTA on their pay. So the classification question is the first gate: get it wrong and you owe back taxes the IRS says you should have withheld all along.
The IRS weighs three factors to decide whether a worker is an employee:7Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
- Behavioral control: whether the company directs how and when the work is done, or the worker decides methods and schedule.
- Financial control: whether the worker has unreimbursed expenses, provides their own tools, and has opportunity for profit or loss.
- Relationship: whether there is a written contract, employee-type benefits, and whether the work is ongoing or project-based.
No single factor decides the question. The IRS looks at all three together. If a reclassification later happens, you can owe back employment taxes, and the exposure grows if you failed to file 1099s or if the misclassification was intentional.8Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes
What to Set Up Before the First Paycheck
Several pieces need to be in place before you run payroll. Skipping any of them creates compliance problems that compound.
You need an Employer Identification Number. Apply using Form SS-4 online, by fax, or by mail. If your EIN has not arrived by the time a deposit or return is due, write “Applied For” with the application date in the EIN space. Do not use your personal Social Security number as a substitute.9Internal Revenue Service. Instructions for Form SS-4
Every new hire completes Form W-4 so you can calculate the right federal income tax withholding. You keep the W-4 in your files rather than sending it to the IRS, and you use it every pay period to run withholding.10Internal Revenue Service. Form W-4 – Employees Withholding Certificate
Federal law also requires you to verify identity and work authorization for every new employee using Form I-9. The employee fills out their section on or before their first day, and you complete yours after examining their documents within three business days of the hire date.11U.S. Citizenship and Immigration Services. Handbook for Employers M-274 – 2.0 Who Must Complete Form I-9
Finally, report each new hire to your state’s Directory of New Hires within 20 days of their start date. States use the data primarily for child support enforcement. Some states set a shorter window than the federal 20-day maximum, so check yours.12Office of the Law Revision Counsel. 42 USC 653a – State Directory of New Hires
Deposit Schedules and Late-Deposit Penalties
Deposits go through the Electronic Federal Tax Payment System, a free Treasury service.13Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System The IRS assigns you a monthly or semiweekly schedule based on your total employment taxes during a lookback period.
- Monthly depositors: $50,000 or less in employment taxes during the lookback period. Deposit by the 15th of the following month.
- Semiweekly depositors: more than $50,000. Deposits follow a schedule tied to your payday.
One rule catches employers off guard. If you accumulate $100,000 or more in tax liability on any single day, you must deposit by the next business day regardless of your normal schedule.14Internal Revenue Service. Employment Tax Due Dates
Late deposits get penalized on a sliding scale:15Office of the Law Revision Counsel. 26 USC 6656 – Failure to Make Deposit of Taxes
- 1 to 5 days late: 2% of the undeposited amount.
- 6 to 15 days late: 5%.
- More than 15 days late: 10%.
- Still unpaid 10 days after the first IRS notice: 15%.
The 10% rate also applies if you were required to use EFTPS and paid by another method. Percentages are on the undeposited amount, not your total tax bill, but on a large payroll they add up fast.
Quarterly and Annual Returns
Depositing money is half the job. You also file returns that reconcile deposits against actual liabilities.
Most employers file Form 941 each quarter, reporting total wages, federal income tax withheld, and both shares of Social Security and Medicare.16Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return Very small employers with annual employment tax liability of $1,000 or less may qualify to file Form 944 once a year instead.17Internal Revenue Service. Certain Taxpayers May File Their Employment Taxes Annually
Form 940 reports federal unemployment tax annually. You may still need to make quarterly FUTA deposits during the year if liability exceeds $500.5Internal Revenue Service. Topic No 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements
By the end of January each year, you must give every employee a Form W-2 for the prior year and file copies with a transmittal Form W-3 with the Social Security Administration. For the 2026 tax year, both are due by February 1, 2027.18Internal Revenue Service. General Instructions for Forms W-2 and W-3 If you file 10 or more information returns in a calendar year (counting W-2s, 1099s, and other types together), you must file electronically.19Internal Revenue Service. Topic No 801, Who Must File Information Returns Electronically
Penalties for late or incorrect W-2s start at $60 per form if you fix the problem within 30 days, jump to $130 per form after that, and reach $340 per form if you fail to file by August 1 or never file at all. Intentional disregard carries a $680 per-form penalty with no cap.20Internal Revenue Service. Information Return Penalties Filing an employment tax return late runs 5% of the unpaid tax per month or partial month overdue, capped at 25%, and stacks on top of failure-to-deposit penalties.21Internal Revenue Service. Failure to File Penalty
Personal Liability for Unpaid Trust Fund Taxes
Most new employers do not see this one coming. If your business fails to pay over the income tax and employee-share FICA that it withheld, the IRS can assess a penalty equal to 100% of those unpaid trust fund taxes against you personally.22Office of the Law Revision Counsel. 26 US Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax This Trust Fund Recovery Penalty cuts through corporate, LLC, and partnership protections to reach the individuals behind the business.
The IRS can pursue anyone who had authority to decide which bills the company paid and who knew (or should have known) that employment taxes were going unpaid. That includes officers, directors, shareholders with financial control, and sometimes bookkeepers or accountants with check-signing authority. The IRS can assess multiple people for the same liability, and it does not need to show bad intent. Using company funds to pay rent or vendors while payroll taxes go unpaid is enough to establish willfulness.1Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
The penalty covers only the trust fund portion: income tax withheld plus the employee share of Social Security and Medicare. It does not reach the employer’s matching share. If your company is under financial pressure and you are deciding which bills to pay first, payroll taxes belong at the top of the list.
State Payroll Obligations Sit on Top of Federal
Federal taxes are only part of the picture. State unemployment insurance is nearly universal, with each state running its own program, wage base, and experience-rating system. New employers are typically assigned a standard rate that adjusts over time based on their layoff history. A few states also require employees to contribute a portion of SUI.
Most states with an income tax require employers to withhold state income tax from wages, with rates, brackets, and forms that vary by state. Multi-state employers face the added complication of withholding for the right jurisdiction. A smaller group of states mandate employer contributions to disability insurance or paid family leave programs. Check your state’s specific rules; the variation is significant.
Recordkeeping
Keep employment tax records for at least four years after the tax is due or paid, whichever is later.23Internal Revenue Service. How Long Should I Keep Records At a minimum, retain every Form 941, Form 940, and W-2 you filed, along with records of each deposit and the dates you made them. Keep all W-4 forms, records of fringe benefits, and documentation supporting any adjustments. If the IRS questions a number and you cannot produce backup, the burden of proving compliance without it falls on you. Some states require longer retention than the federal four-year floor.
First-Time Penalty Relief
If you slip once after a clean track record, the IRS offers an administrative waiver called First-Time Abate. To qualify, you must have filed the same type of return for the three prior tax years and received no penalties during that period. The waiver covers failure-to-file, failure-to-pay, and failure-to-deposit penalties.24Internal Revenue Service. Administrative Penalty Relief Request it by calling the IRS or writing a letter. No formal reasonable-cause argument is required, which makes it the simplest relief available. If you owe a first-time penalty and your history is clean, ask for the abatement before paying.