Employment taxes are the federal taxes an employer withholds from employee wages and pays based on those wages. They come in four pieces: Social Security tax, Medicare tax, federal unemployment tax (FUTA), and federal income tax withholding. Employers and employees split Social Security and Medicare; the employer alone pays FUTA; and income tax withholding is the employee’s own money, routed to the IRS through the employer. Self-employed workers pay a parallel version called self-employment tax. Getting any of this wrong is expensive, and one specific failure — not turning over withheld funds — can reach the owner personally.
Social Security and Medicare (FICA)
The Federal Insurance Contributions Act funds Social Security and Medicare through matching contributions. Each side pays 6.2% of wages toward Social Security, but only on earnings up to the annual wage base. For 2026 that cap is $184,500; every dollar above it is exempt from the Social Security portion.1Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
Medicare has no wage cap. Employer and employee each pay 1.45% on all covered wages.2Office of the Law Revision Counsel. 26 USC Ch. 21: Federal Insurance Contributions Act High earners owe an additional 0.9% Medicare surtax, paid only by the employee. The employee’s threshold depends on filing status: $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately. Employers, however, must begin withholding the surtax once an employee’s wages pass $200,000 in a calendar year, regardless of filing status.3Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Combined, FICA runs 15.3% for most workers, split evenly at 7.65% each. The employer’s half is a business expense. The employee’s half comes out of the paycheck.
Federal Unemployment Tax (FUTA)
FUTA falls entirely on the employer. Workers never see it on a pay stub. The statutory rate is 6.0% on the first $7,000 in wages paid to each employee during the year. Once you’ve paid a worker $7,000, FUTA stops for that worker.4Office of the Law Revision Counsel. 26 USC Subtitle C, Chapter 23
Almost no employer pays the full 6.0%. Employers who pay their state unemployment taxes on time receive a credit of up to 5.4%, dropping the effective FUTA rate to 0.6% per employee. That works out to a maximum of $42 per worker per year.5Office of the Law Revision Counsel. 26 USC 3302: Credits Against Tax Losing that credit through late state payments is one of the more avoidable payroll mistakes.
A separate risk: credit reduction states. When a state carries an outstanding federal unemployment loan across two consecutive January 1 dates and hasn’t repaid by November 10 of the second year, employers in that state lose part of the FUTA credit. The reduction starts at 0.3% and grows by 0.3% for each additional year the debt remains unpaid. The Department of Labor names affected states after the November 10 deadline, and the IRS publishes the rates in the Schedule A (Form 940) instructions.6Internal Revenue Service. FUTA Credit Reduction
Federal Income Tax Withholding
Employers withhold federal income tax from each paycheck using the information on Form W-4: filing status, dependents, other income, and any additional withholding the employee requests. Those inputs feed IRS withholding tables that produce the amount taken from each check.7Internal Revenue Service. Form W-4 (2026) Employee’s Withholding Certificate
This is not the employer’s money. It belongs to the employee and is being routed to the IRS on a schedule. If an employer fails to withhold the correct amount, the employer can be held liable for the shortfall. If a W-4 results in too little withheld, the employee owes at tax time and may face an underpayment penalty.
At year end, each employee gets a Form W-2 showing total wages and taxes withheld. For the 2026 tax year, W-2s must reach employees and the Social Security Administration by February 1, 2027. If a former employee requests their W-2, the employer has 30 days to deliver it.8Internal Revenue Service. General Instructions for Forms W-2 and W-3
Self-Employment Tax
If you work for yourself, there’s no employer to split FICA with, so you pay both sides. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.9Office of the Law Revision Counsel. 26 USC 1401: Rate of Tax The Social Security portion applies only up to the $184,500 wage base that applies to employees.1Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
Self-employment tax kicks in once net earnings reach $400 for the year.10Office of the Law Revision Counsel. 26 USC Ch. 2: Tax on Self-Employment Income You calculate it on Schedule SE and can deduct half of what you owe when figuring adjusted gross income, roughly balancing the fact that a traditional employer’s share of FICA is itself a business expense.11Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes
With no employer withholding for you, the IRS expects quarterly estimated payments. For the 2026 tax year, those are due April 15, June 15, September 15, and January 15, 2027. Missing a quarter triggers interest and a potential underpayment penalty.
Employee or Independent Contractor
Whether a worker is an employee or an independent contractor decides whether any employment tax obligation exists in the first place. The IRS weighs three categories of evidence:12Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
- Behavioral control: whether the company directs what the worker does and how. Employees usually get detailed instructions and training; contractors set their own methods.
- Financial control: whether the business controls the economics of the work, including how the worker is paid, whether expenses are reimbursed, and who supplies the tools.
- Relationship of the parties: whether there’s a written contract, whether benefits like insurance or a pension are provided, and whether the work is a continuing part of the business.
No single factor decides it. If the status is unclear, either the business or the worker can file Form SS-8 and ask the IRS to determine it.13Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Misclassification is a common audit target. An employer that treated an employee as a contractor can owe the full unpaid FICA, part of what should have been withheld, penalties for unfiled W-2s, and interest. Businesses that can show a reasonable basis for the treatment — a prior IRS audit, established industry practice, or professional advice — may qualify for Section 530 relief, which eliminates the employment tax liability for the affected workers.14Internal Revenue Service. Worker Reclassification – Section 530 Relief
The Trust Fund Recovery Penalty
Federal income tax and the employee’s share of FICA are “trust fund taxes.” The employer holds them for the government. If a business fails to pay them over, the IRS can assess the Trust Fund Recovery Penalty against any individual who was responsible for the payment and willfully failed to make it. The penalty equals 100% of the unpaid tax. It is not an add-on; it is the entire amount, collected personally.15Office 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 bills get paid. That reaches officers, directors, shareholders with financial control, partners, and bookkeepers or payroll managers who exercise independent judgment about disbursements. The IRS regularly pursues more than one person inside the same organization.16Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
Incorporating or forming an LLC does not shield you here. If cash was tight and you paid vendors or ran payroll instead of remitting withheld taxes, you can be personally liable for every dollar.
Filing and Deposit Obligations
Most employers file Form 941 quarterly, reporting wages, tips, federal income tax withheld, and both shares of FICA.17Internal Revenue Service. Depositing and Reporting Employment Taxes The 941 deadlines are April 30, July 31, October 31, and January 31.18Internal Revenue Service. Instructions for Form 941 (03/2026) Very small employers with total annual liability of $1,000 or less for Social Security, Medicare, and withheld income tax may file Form 944 once a year instead, but only if the IRS notifies them in writing that they qualify.19Internal Revenue Service. About Form 944, Employer’s Annual Federal Tax Return FUTA has its own annual return, Form 940.
Deposits are generally electronic, through EFTPS, business Direct Pay, or your business tax account. Your deposit schedule is based on what you reported over a four-quarter lookback period. Reported $50,000 or less: monthly. Above $50,000: semiweekly. If accumulated liability hits $100,000 on any single day, deposit by the next business day and switch to semiweekly for the rest of the year. If total quarterly liability is under $2,500, you can skip deposits and pay with a timely filed 941; Form 944 filers get the same break at $2,500 for the year.20Internal Revenue Service. Topic No. 757, Forms 941 and 944 – Deposit Requirements
Late deposits carry tiered penalties:21Office of the Law Revision Counsel. 26 U.S. Code 6656 – Failure to Make Deposit of Taxes
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- Still unpaid 10 days after a delinquency notice: 15%
These penalties sit on top of the tax, and interest accrues separately. Late filing of the return itself adds another layer. Willful failures can bring criminal exposure.
Recordkeeping
Employment tax records must be kept at least four years after the tax becomes due or is paid, whichever is later.22Internal Revenue Service. How Long Should I Keep Records The IRS expects wage amounts and payment dates, employee names and Social Security numbers, W-4 copies, tip reports, employment dates, deposit amounts and dates with EFTPS acknowledgment numbers, and copies of all filed returns.23Internal Revenue Service. Employment Tax Recordkeeping Four years is the floor, not a promise that an older year won’t come up in an audit.