Hiring employees is an exciting step for any growing business, but it also comes with serious tax responsibilities. Once you put someone on payroll, your business is responsible for more than issuing paychecks. You may need to withhold taxes from employee wages, pay your share of payroll taxes, make timely deposits, file payroll tax returns, and keep accurate records.
One of the most common questions small business owners ask is: What payroll taxes does a small business have to pay? In general, payroll taxes for small business employers may include federal income tax withholding, Social Security tax, Medicare tax, federal unemployment tax, and applicable state or local payroll taxes. Employers are also responsible for depositing and reporting these taxes according to federal and state rules.
Payroll compliance matters because mistakes can lead to penalties, interest, employee disputes, and tax notices. The good news is that with the right systems and professional support, payroll can be managed clearly and consistently.
This guide explains what employer payroll taxes are, how they work, what records to keep, and how small businesses can avoid common payroll mistakes.
What Are Payroll Taxes?
Payroll taxes are taxes connected to employee wages. Some are withheld from employee paychecks, while others are paid by the employer. In many cases, the employer is responsible for collecting, depositing, reporting, and paying the taxes to the appropriate tax agencies.
Federal payroll tax responsibilities commonly include:
- Federal income tax withholding
- Social Security tax
- Medicare tax
- Additional Medicare Tax withholding for high-wage employees
- Federal unemployment tax, also known as FUTA
State and local requirements may also apply. These may include state income tax withholding, state unemployment insurance, disability insurance, paid family leave taxes, workers’ compensation-related costs, or local payroll taxes depending on where the business and employees are located.
Because payroll tax rules vary by jurisdiction, small businesses should confirm both federal and state requirements before running payroll.
What Payroll Taxes Does a Small Business Have to Pay?
A small business with employees generally must withhold federal income tax from employee wages, withhold and match Social Security and Medicare taxes, pay federal unemployment tax, and comply with applicable state and local payroll tax requirements.
For federal employment taxes, the IRS states that most employers must withhold, deposit, report, and pay income tax, Social Security tax, Medicare tax, and FUTA tax. Social Security and Medicare taxes are generally shared by the employee and employer, while FUTA is paid by the employer and is not withheld from employee wages.
The exact amount depends on wages, employee Form W-4 information, tax rates, wage limits, deposit schedules, and state rules.
Federal Income Tax Withholding
Federal income tax withholding is the amount withheld from an employee’s wages and sent to the IRS on the employee’s behalf. The amount depends on the employee’s Form W-4, wages, pay frequency, and IRS withholding tables.
Employers should have each employee complete Form W-4 when they are hired. If the employee updates their withholding later, the employer should apply the new information according to payroll rules.
Federal income tax withholding is not an employer expense in the same way employer Social Security, Medicare, or FUTA taxes are. It is money withheld from the employee’s wages, but the employer is responsible for depositing and reporting it correctly.
Social Security and Medicare Taxes
Social Security and Medicare taxes are often called FICA taxes. These taxes are generally paid by both the employee and the employer.
For 2026, the Social Security tax rate is 6.2% for the employee and 6.2% for the employer, up to the annual wage base limit of $184,500. The Medicare tax rate is 1.45% for the employee and 1.45% for the employer, and there is no wage base limit for Medicare tax.
Employers must also withhold Additional Medicare Tax from wages paid to an employee above the applicable threshold. The IRS states that employers must withhold an additional 0.9% Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year. This additional amount is withheld from the employee’s wages and does not have a matching employer share.
Federal Unemployment Tax
Federal unemployment tax, or FUTA, helps fund unemployment compensation programs. Unlike Social Security and Medicare taxes, FUTA is generally paid by the employer and is not withheld from employee wages.
FUTA rules can interact with state unemployment taxes, and many employers may receive a credit for state unemployment tax paid, subject to applicable rules. Employers should track wages, state unemployment obligations, and federal FUTA requirements carefully.
Because unemployment tax rules can vary, businesses should review both federal and state requirements, especially when hiring employees in multiple states.
State and Local Payroll Taxes
Federal payroll taxes are only part of the picture. Small businesses may also need to register with state agencies and comply with state or local payroll tax rules.
Depending on the location, employers may need to handle:
- State income tax withholding
- State unemployment insurance
- Local income tax withholding
- Disability insurance contributions
- Paid family and medical leave contributions
- Workers’ compensation-related payroll reporting
- Local payroll or occupational taxes
If your business has remote employees, multi-state employees, or employees who work in more than one location, payroll can become more complex. State registration, withholding, and reporting may depend on where the employee works, where the business is located, and applicable state laws.
Scannable List: Payroll-Related Deductions and Business Expenses
Payroll affects more than compliance. It also affects your business deductions and financial reporting. Many payroll-related costs may be deductible business expenses when properly documented and connected to your business.
Common payroll-related deductions and expenses may include:
- Employee wages
- Salaries
- Bonuses
- Commissions
- Employer Social Security tax
- Employer Medicare tax
- Federal unemployment tax
- State unemployment tax
- Payroll processing fees
- Payroll software subscriptions
- Bookkeeping and accounting fees
- Employee health insurance premiums
- Retirement plan contributions
- Workers’ compensation insurance
- Employee training costs
- Recruiting and hiring expenses
- Background check fees
- Time-tracking software
- HR software subscriptions
- Employee uniforms, if required
- Reimbursed business expenses
- Contractor payments, if properly classified
- Professional employer organization fees
- Benefits administration costs
These expenses should be supported by payroll reports, invoices, bank records, benefit statements, and tax filings. Proper classification and documentation are essential.
Payroll Tax Deposits and Filing Responsibilities
Employers must not only calculate payroll taxes correctly; they must also deposit them on time. Payroll taxes are generally deposited according to a schedule determined by IRS rules, often based on the employer’s prior payroll tax liability.
Employers may also need to file federal payroll tax forms, such as quarterly employment tax returns and annual wage reporting forms. Common payroll-related filings may include:
- Form 941 for quarterly federal payroll tax reporting
- Form 940 for annual federal unemployment tax reporting
- Form W-2 for employee wage reporting
- Form W-3 for transmitting wage statements
- State payroll tax returns
- State unemployment filings
- Local payroll tax filings, if applicable
Filing and deposit requirements can vary depending on the size of the payroll, business structure, and tax liability. Missing deadlines can create penalties even if the tax is eventually paid.
Employee vs. Independent Contractor Classification
Payroll tax responsibilities depend heavily on worker classification. Employees are generally paid through payroll and subject to withholding. Independent contractors are usually not paid through payroll and may receive Form 1099-NEC if reporting requirements are met.
However, a business cannot simply choose contractor status to avoid payroll taxes. Classification depends on the facts of the working relationship, including control, independence, and how the work is performed.
Misclassifying employees as contractors can lead to back payroll taxes, penalties, interest, and state compliance issues. If you are unsure whether a worker should be treated as an employee or contractor, speak with a qualified tax professional before paying them.
Common Payroll Tax Mistakes Small Businesses Should Avoid
Payroll mistakes are common, especially when a business is hiring for the first time or managing payroll manually.
Common mistakes include:
- Failing to register with tax agencies
- Not collecting Form W-4 from employees
- Misclassifying employees as contractors
- Missing payroll tax deposit deadlines
- Calculating withholding incorrectly
- Forgetting state or local payroll taxes
- Failing to file Forms 941 or 940
- Issuing W-2s late
- Not reconciling payroll reports to accounting records
- Mixing payroll funds with general cash flow
- Ignoring tax notices
- Not updating payroll when employees move states
Because payroll taxes include money withheld from employees, the IRS and state agencies take missed deposits seriously. It is better to set up payroll correctly from the beginning than to fix compliance problems later.
How to Stay Compliant With Payroll Taxes
Small businesses can reduce payroll risk by using reliable systems and reviewing payroll regularly.
Best practices include:
- Use reputable payroll software or a payroll provider.
- Register with federal and state agencies before running payroll.
- Collect completed Form W-4 from each employee.
- Verify employee work eligibility using Form I-9.
- Track pay rates, hours, overtime, bonuses, and benefits accurately.
- Review payroll reports each pay period.
- Deposit payroll taxes on time.
- File payroll tax returns by the deadline.
- Keep payroll records organized.
- Reconcile payroll reports with bookkeeping.
- Review worker classification before hiring.
- Consult an accountant before expanding into new states.
Payroll is not a once-a-year task. It requires ongoing attention throughout the year.
FAQ: Payroll Taxes for Small Business
What payroll taxes does a small business have to pay?
A small business with employees generally must withhold federal income tax, withhold and match Social Security and Medicare taxes, pay federal unemployment tax, and comply with applicable state and local payroll taxes.
Are payroll taxes paid by the employer or employee?
Some payroll taxes are paid by employees through withholding, some are paid by employers, and some are shared. Social Security and Medicare are generally shared. Federal income tax is withheld from employee wages. FUTA is generally paid by the employer.
What happens if a small business does not pay payroll taxes?
If a small business does not pay required payroll taxes, it may face penalties, interest, tax notices, collection action, and potential personal liability for responsible parties. Payroll tax issues should be addressed as soon as possible.
Final Thoughts: Payroll Taxes Require Accuracy and Consistency
Managing payroll taxes for small business operations is one of the most important responsibilities employers have. Payroll taxes affect employee paychecks, business deductions, tax filings, cash flow, and compliance.
The most important step is to treat payroll as an ongoing process, not a last-minute task. Employers must calculate wages correctly, withhold required taxes, pay employer payroll taxes, deposit amounts on time, file required forms, and keep accurate records.
Need help setting up or reviewing your payroll process? Book a consultation with our accounting team today. We can help you understand your payroll tax responsibilities, review your worker classification, and build a compliant payroll system for your small business.