Understanding Payroll Taxes & Employer Responsibilities

Introduction

Payroll taxes are mandatory taxes employers must withhold from employee wages and pay to federal and state agencies. These taxes include Social Security, Medicare, federal and state income tax withholding, and unemployment taxes under IRC § 3101, § 3111, and § 3301.

Employers must accurately calculate, report, and remit payroll taxes to avoid IRS penalties and legal issues. This guide explains how payroll taxes work, employer responsibilities, and how to stay compliant in 2025.

What Are Payroll Taxes?

Payroll taxes include:

1. Federal Insurance Contributions Act (FICA) Taxes (IRC § 3101 & § 3111)

• Social Security Tax – 6.2% withheld from employee wages, matched by the employer (12.4% total).
• Medicare Tax – 1.45% withheld from employee wages, matched by the employer (2.9% total).
• Additional Medicare Tax – Extra 0.9% on wages over $200,000 for high earners.

2. Federal Income Tax Withholding (IRC § 3402)

• Employers must withhold federal income tax from employee paychecks based on Form W-4.
• The amount depends on earnings, filing status, and deductions claimed.

3. State and Local Payroll Taxes

• State income tax varies by state laws (not applicable in Texas, Florida, Nevada, and others).
• Some local governments impose city or county payroll taxes.

4. Federal Unemployment Tax Act (FUTA) (IRC § 3301)

• Employers pay 6% on the first $7,000 of each employee’s wages.
• A credit of up to 5.4% may apply for employers who pay state unemployment taxes (SUTA).

5. Self-Employment Tax (IRC § 1401)

• Self-employed individuals pay both employer and employee portions of Social Security and Medicare taxes (15.3% total).
• Reported on Schedule SE (Form 1040).

Employer Responsibilities for Payroll Taxes

1. Withhold and Deposit Payroll Taxes on Time

• Taxes must be withheld from employee paychecks and deposited to the IRS.
• Deposits are due semi-weekly or monthly, depending on payroll size.

2. File Payroll Tax Forms

Employers must file quarterly and annual payroll tax forms:

• Form 941 – Reports federal income tax, Social Security, and Medicare taxes (filed quarterly).
• Form 940 – Reports FUTA tax (filed annually).
• Form W-2 – Reports employee earnings and tax withholdings (issued annually to employees and the IRS).
• Form W-3 – Summary of all W-2 forms sent to the Social Security Administration.

3. Issue W-2 and 1099 Forms to Workers

• W-2 forms for employees (must be sent by January 31).
• 1099-NEC forms for independent contractors paid over $600.

4. Maintain Payroll Records for at Least Three Years

• IRS requires businesses to keep payroll tax records, employee tax forms, and wage reports.

5. Use a Payroll System to Ensure Compliance

• Payroll software like ADP, Gusto, QuickBooks Payroll, or Paychex automates tax withholding and reporting.

Common Payroll Tax Mistakes to Avoid

• Failing to withhold taxes correctly – Leads to IRS penalties and audits.
• Late payroll tax deposits – Results in fines of up to 15% of the unpaid tax amount.
• Misclassifying workers as independent contractors – Employers may owe back taxes and penalties if workers are incorrectly classified.
• Not filing Form 941 quarterly – Causes IRS compliance issues.
• Ignoring state payroll tax requirements – Some states impose additional payroll tax obligations.

How to Stay Compliant with Payroll Tax Laws

Step 1: Register for an Employer Identification Number (EIN)

• Required to report payroll taxes to the IRS and state agencies.
• Apply online at irs.gov.

Step 2: Set Up Payroll Tax Withholding

• Collect Form W-4 from new employees.
• Use payroll software or a CPA to calculate and withhold the correct tax amounts.

Step 3: Deposit Payroll Taxes on Time

• Check IRS deposit schedules (monthly or semi-weekly).
• Use EFTPS (Electronic Federal Tax Payment System) to make deposits.

Step 4: File Payroll Tax Returns

• File Form 941 quarterly and Form 940 annually.
• Issue W-2s and 1099-NECs by January 31.

Step 5: Keep Payroll Records Organized

• Maintain employee tax forms, wage reports, and deposit records for at least three years.

IRS Forms & Compliance Checklist

• Form 941 – Quarterly payroll tax return.
• Form 940 – Annual FUTA tax return.
• Form W-2 & W-3 – Employee wage and tax reporting.
• Form 1099-NEC – Independent contractor payments.
• Payroll records – Maintain for at least three years for IRS compliance.

Conclusion

Employers must accurately calculate, withhold, and file payroll taxes to avoid IRS penalties. Using payroll software or working with a CPA ensures compliance and smooth payroll management.

For expert payroll tax assistance, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.

Frequently Asked Questions (FAQs)

1. What happens if I don’t pay payroll taxes on time?
The IRS may impose penalties up to 15% of the unpaid tax amount.

2. Can I do payroll manually?
Yes, but using payroll software or a CPA reduces errors and ensures compliance.

3. How do I classify workers correctly?
Employees receive W-2 forms, while independent contractors receive 1099-NEC forms.

4. What is the penalty for misclassifying employees as contractors?
Employers may owe back taxes, penalties, and interest for unpaid payroll taxes.

5. Do I need to pay payroll taxes if I have no employees?
No, but self-employed individuals must pay self-employment tax.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant and an IRS Enrolled Agent (EA). He specializes in payroll tax compliance, tax planning, and small business accounting.

Schedule a consultation today with Anshul Goyal, CPA, to ensure payroll tax accuracy and compliance.