Introduction: Understanding Payroll Taxes to Stay IRS-Compliant
If you have employees—or even if you pay yourself through payroll as an S-Corp owner—you must properly handle payroll taxes to avoid IRS penalties.
Payroll taxes cover Social Security, Medicare, unemployment taxes, and federal & state income tax withholdings. Failing to calculate, file, and pay on time can result in hefty fines.
This guide will break down what payroll taxes are, how they work, and what small business owners need to do to stay compliant.
1. What Are Payroll Taxes?
Payroll taxes are mandatory taxes withheld from employee wages and paid by employers to fund government programs like Social Security and Medicare.
✅ Payroll Taxes Include:
✔ Federal Income Tax – Withheld from employees’ wages (based on W-4 elections).
✔ Social Security Tax (6.2%) – Paid by both employers & employees.
✔ Medicare Tax (1.45%) – Paid by both employers & employees.
✔ Additional Medicare Tax (0.9%) – For employees earning over $200,000 (single) or $250,000 (married).
✔ Federal Unemployment Tax (FUTA) – Paid only by the employer to fund unemployment benefits.
✔ State Payroll Taxes – Vary by state (e.g., unemployment, disability insurance).
📌 Important: Employers must match Social Security & Medicare taxes—meaning they pay an additional 7.65% on top of what is withheld from employee paychecks.
💡 Tip: The IRS heavily audits payroll tax issues, so staying compliant is critical.
2. Payroll Tax Rates for 2025
| Payroll Tax Type | Employee Pays | Employer Pays | Total Tax Rate |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | 12.4% (on income up to $168,600) |
| Medicare | 1.45% | 1.45% | 2.9% (on all income) |
| Additional Medicare | 0.9% (if income over $200K) | ❌ | 0.9% |
| FUTA (Unemployment) | ❌ | 6.0% (on first $7,000 per employee) | 6.0% |
| State Unemployment (SUTA) | Varies by state | Varies by state | Varies |
📌 Example: If an employee earns $50,000/year, payroll taxes would be:
✔ Social Security: $3,100 (employee) + $3,100 (employer)
✔ Medicare: $725 (employee) + $725 (employer)
✔ FUTA (Employer Only): $420
💡 Tip: Employers are responsible for withholding the employee’s portion and submitting it along with their own employer contributions.
3. Who Needs to Pay Payroll Taxes?
🚀 You must withhold and pay payroll taxes if:
✔ You have W-2 employees.
✔ You pay yourself a salary as an S-Corp owner.
✔ You operate a C-Corporation with employee wages.
🚨 You DO NOT pay payroll taxes on:
❌ 1099 independent contractors (they pay their own self-employment tax).
❌ Distributions from an S-Corp or C-Corp.
📌 Key Rule: If you control when, where, and how someone works, they are likely an employee, not a contractor—misclassification can result in IRS penalties.
💡 Tip: Use Form W-9 for contractors and Form W-4 for employees to properly classify workers.
4. How to Calculate Payroll Taxes
✅ Step 1: Determine Employee Gross Pay
- Example: Employee earns $5,000 per month.
✅ Step 2: Calculate Tax Withholdings
✔ Social Security Tax: $5,000 × 6.2% = $310 (employee) + $310 (employer)
✔ Medicare Tax: $5,000 × 1.45% = $72.50 (employee) + $72.50 (employer)
✔ Federal Income Tax: Based on IRS tax brackets & W-4 form.
✔ State Income Tax: Varies by state.
✅ Step 3: Submit Payroll Taxes to the IRS
- Employers must deposit withheld payroll taxes either monthly or semi-weekly via the Electronic Federal Tax Payment System (EFTPS).
📌 Example Payroll Tax Breakdown for $5,000 Monthly Salary:
| Tax Type | Employee Pays | Employer Pays |
|---|---|---|
| Social Security (6.2%) | $310 | $310 |
| Medicare (1.45%) | $72.50 | $72.50 |
| Federal Income Tax (Estimate) | $700 | ❌ |
| State Income Tax (Estimate) | $200 | ❌ |
| FUTA (Employer Only) | ❌ | $30 |
💡 Tip: Payroll software like Gusto, QuickBooks Payroll, or ADP can automatically calculate and file payroll taxes for you.
5. How to File & Pay Payroll Taxes
✔ Step 1: Withhold Payroll Taxes – Deduct taxes from employee paychecks each pay period.
✔ Step 2: Deposit Payroll Taxes – Use EFTPS (IRS.gov/payments) to deposit withheld taxes semi-weekly or monthly.
✔ Step 3: File IRS Payroll Tax Forms:
✅ Important Payroll Tax Forms & Deadlines
| Form | Purpose | Due Date |
|---|---|---|
| Form 941 | Reports quarterly payroll taxes | April 30, July 31, Oct 31, Jan 31 |
| Form 940 | Reports annual unemployment tax (FUTA) | January 31 |
| W-2 Forms | Reports employee wages & withholdings | January 31 |
| W-3 Form | Summarizes all W-2s for the IRS | January 31 |
| 1099-NEC | Reports contractor payments (if over $600) | January 31 |
💡 Tip: Filing late or inaccurately can lead to IRS penalties and interest charges—ensure payroll taxes are filed on time.
6. Payroll Tax Mistakes That Can Lead to IRS Penalties
🚨 Common Payroll Tax Mistakes:
✔ Misclassifying Employees as Contractors – Leads to unpaid payroll taxes & IRS fines.
✔ Failing to Pay Payroll Taxes on Time – Results in penalties up to 15%.
✔ Not Keeping Payroll Records – IRS requires records for at least 4 years.
✔ Forgetting FUTA & State Unemployment Taxes – Can lead to state tax audits.
💡 Tip: The IRS considers unpaid payroll taxes as theft—always pay payroll taxes before any other business expenses.
7. Should You Use a Payroll Service?
Managing payroll taxes can be complex. Many small business owners use payroll services to automate tax filings and compliance.
✅ Best Payroll Software for Small Businesses
✔ Gusto – Affordable, easy-to-use payroll & benefits.
✔ QuickBooks Payroll – Integrates with QuickBooks accounting.
✔ ADP – Best for growing businesses.
💡 Tip: A payroll service ensures accurate tax calculations & on-time filings, reducing IRS risks.
Conclusion: Stay Compliant & Avoid IRS Payroll Tax Problems
📌 To manage payroll taxes properly:
✔ Withhold federal, state, Social Security, and Medicare taxes.
✔ Submit deposits monthly or semi-weekly via EFTPS.
✔ File IRS payroll tax forms on time.
✔ Use payroll software or a professional for accuracy.
📌 Need help managing payroll taxes? Contact First Union Tax for payroll tax filing, compliance, and IRS assistance!
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