Paying Payroll Taxes for Small Business
Payroll taxes are local, state, and federal taxes which you will need to withhold from your employees’ salaries in order to pay the IRS.
Payroll taxes include:
- Social Security tax
- Medicare tax
- Additional Medicare tax
- Federal income tax
- Federal unemployment tax (FUTA)
- Self-employment tax
Withholding does not apply to FUTA tax; this is paid solely by employers. Keep in mind that in addition to the amount withheld, you will be required to contribute a commensurate amount towards your employees’ Social Security and Medicare taxes.
Paying your payroll taxes can be a complicated process. We have broken it down for you in the following steps:
Apply for an Employer Identification Number
If you do not already have an Employer Identification Number (EIN), you will be required to apply for one. This can be thought of as the Social Security number of your business.
The IRS needs your business’s EIN to correctly identify it, meaning it is a requirement for anyone that needs to pay payroll taxes or hire employees. You will need to include it when filing your employees’ W-4 forms.
If you do not already have an EIN, you can apply for one:
- Online through the IRS website
- Faxing a completed Form SS-4 to (855) 641-6935
- Mailing the completed form to the address below:
- Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
- Calling (267) 941-1099 and providing the same information as you would include on Form SS-4. This is only available for international entities.
Choosing a Payroll Schedule
After you have correctly registered for your EIN, you will need to choose your payroll schedule.
This involves determining your:
- Employee’s pay dates
- Payroll tax pay dates
- Filing requirement due dates
Your schedule can be up to you, but you will need to satisfy your state’s minimum payday requirements:
States With Multiple Payday Requirements
- Connecticut: Weekly. Longer payday intervals of up to monthly can be allowed if approved by the labor commissioner.
- Hawaii: Semi-monthly. Workers can choose to be paid monthly under a special election procedure. Exceptions can also be granted by the Director of Labor.
- Illinois: Semi-monthly. Monthly for executive, administrative, and professional personnel.
- Louisiana: Biweekly. Employers with 10 or more workers operating in manufacturing, mining, or boring for oil and public service corporations may pay workers semi-monthly.
- Massachusetts: Semi-monthly. Monthly pay dates are allowed in specific circumstances.
- Minnesota: Monthly. This is reduced to semi-monthly for workers in transitory employment and in public service corporations.
- Nevada: Semi-monthly. Monthly for executive, administrative, and professional personnel.
- New Hampshire: Weekly or biweekly. Exceptions can be granted by the NHDOL.
- New Jersey: Semi-monthly. Executive, supervisory, and other “special classifications” of employees may be paid monthly.
- New Mexico: Semi-monthly. Monthly for executive, administrative, and professional personnel.
- New York: Semi-monthly. Weekly pay for manual workers
- Rhode Island: Weekly or semi-monthly. Childcare providers can be paid biweekly if they choose to.
- Texas: Semi-monthly. Employees exempt from the overtime provisions of the Fair Labor Standards Act may be paid monthly.
- Utah: Semi-monthly. Employees on an annual salary may be paid monthly.
- Vermont: Weekly. Employers may implement by-weekly or semi-monthly pay as long as sufficient written notice is provided
- Virginia: Biweekly or semi-monthly. Employees whose weekly wages exceed 150% of the average weekly wage of the Commonwealth or who are classified as “executive, administrative, and professional personnel” may be paid monthly.
- Wisconsin: Monthly. Certain classifications of employees (e.g., those engaged in logging, farm labor, etc.) may be paid quarterly.
- Michigan (dependant on occupation)
- Montana (Presumed semi-monthly unless otherwise stated in employment contract.)
- North Carolina
- South Carolina
Set Up a Separate Payroll Account
This is not a requirement, but it can help you accurately separate your business’s discretionary funds and taxes.
You may want to create a separate business bank account which you will use exclusively for depositing your employees’ payroll taxes and paying your employees.
Complete W-4 Forms
To pay your payroll taxes, you will need to ask all of your employees to fill out a Form W-4 when they begin working for your business. The IRS refers to this form as a “withholding certificate.”
A W-4 includes all of your employees’ allowances and filing status to let you determine what percentage you should withhold from their salary.
Simply put, the more personal allowances or dependents an employee has (e.g., children, elders, etc.), the fewer payroll taxes that they will be required to pay each pay period.
Filling out W-4 forms correctly is important in order to avoid:
- Back taxes
- Criminal charges
Keep in mind that W-4 forms have been updated since the beginning of 2020, transitioning them from a system of allowances into one that asks straightforward questions. This change was made to ensure that employees could accurately calculate how much needs to be withheld from their paycheck without any professional help.
The “updated” W-4 form can be filled out by following a five-step process:
Step 1: Personal Information
Here your employees will need to provide all of their personal information and presumed filing status. This will be used by you to determine your employees’ payroll withholdings.
Step 2: Filing Status
Your employees will need to fill in step two if they:
- Hold two or more jobs simultaneously
- Are married and are filing jointly with a spouse who is also working
This is because these factors affect employees’ filing status and consequent withholding threshold. For example, married and filing jointly couples threshold for Additional Medicare tax is $250,000 (instead of $200,000).
This means they would be able to claim back any Additional Medicare tax paid between $200,000 and $250,000.
Whether your employees register their incomes jointly or separately is also important for Social Security tax, as this only needs to be paid for the first $147,000 that employees make.
Step 3: Dependents
If your employees have children or other dependents (e.g., elders) , this step will provide instructions relating to how they can determine how much tax allowance they will be offered.
Step 4: Income and Deductions
Step four should be used to include income that is generated from other sources. This could be income from:
- Side hustles
Your employees will also need to include:
- Any additional deductions that they plan to take. These will reduce the total amount of their salary that should be withheld.
- Any additional withholding that needs to occur (and why).
Step 5: Signatures
Here your employees will simply sign and date their W-4 form.
Keep in mind that employees are also able to use the W-4 to declare themselves exempt from any withholding. This is usually the case if a person’s standard deduction exceeds the amount that they will have to pay in payroll taxes.
Calculate Withholding Taxes
You will need to calculate how much you will need to withhold from your employees’ salaries and how much they will be taking home every pay period.
If you are not relying on an accountant or a payroll or accounting software, make sure that you allocate enough time each pay period to calculate this correctly.
You can use the IRS Tax Withholding Estimator to calculate how much of an employee’s wage you should withhold for federal, state, and other payroll taxes.
It is also important that you keep thorough and clear records of this, as you will mostly be required to supplement the amount withheld with a commensurate amount.
For example, besides the 6.2% that you will withhold from your employees for Social Security tax, you will need to add an additional 6.2% yourself.
If you pay your workers an annual salary, keep in mind that any employee that is paid an annual salary that is less than $35,568 per annum needs to be paid an overtime rate for working hours that exceed 40 in any given week.
Calculate Net Pay
Your employees’ net pay is the amount that they will be taking home after all deductions have been made. This includes payroll taxes.
This can be calculated by:
- Determining an employee’s gross pay
- Subtracting pre-tax deductions (e.g., Medical benefits, 401(k) retirement plans, state income tax, disability insurance, etc.).
- Subtracting the amount that you are withholding for payroll taxes (e.g., Social Security, federal income tax, Medicare, etc.).
- Subtracting post-tax deductions (e.g., charitable donations, garnishments, union dues, etc.).
Deposit Payroll Tax
To determine your payment schedule, see Publication 15 (Forms 941, 944, and 945) and Publication 51 (Form 943). You will need to make deposit payments electronically through the Electronic Federal Tax Payment System (EFTPS).
Report Payroll Tax
When it comes to reporting your payroll taxes, you will need to use a different form depending on the type of payroll tax in question:
- Federal income tax (Form 941)
- Social Security and Medicare tax (Form 941)
- Additional Medicare tax (Form 941)
- Federal unemployment tax (FUTA) (Form 940)
- Self-employment tax (Schedule SE for Form 1040)
There are additional rules to consider for certain scenarios:
- Agricultural workers: Form 943
- Backup withholding: Form 945
- Employers who have received written notification relating to the Form 944 program: Form 944
You will have to decide how to report your payroll taxes. This can be done both electronically through E-File or by post.
If you would rather report your payroll taxes by mail, the address that you will have to use will depend on the form and your state. The IRS provides a list of mailing locations for each form:
File W-2 and W-3 Forms
All employers engaged in a business that pays $600 or more in payroll taxes are required to file both a Form W-2 and a Form W-3 with the Social Security Administration (SSA) for every person that they employ.
When filing your Form W-2 and Form W-3, remember the following:
- Type all of your entries using black ink. This is to ensure that it can be read clearly.
- Make all dollar entries without dollar signs and commas. (i.e., $5,000.25 would be written as 5000.25)
- Do not make any erasures, cross-outs, or whiteouts. If you make a handwritten mistake, you will need to start a new form.
- Leave a box blank if it does not apply. (i.e., do not write any variation of “N/A”)
If you do not wish to file your forms electronically, you must order scannable copies from the IRS by calling 1-800-829-3676 or by visiting the IRS website. These will need to be submitted to the following address:
Social Security Administration
Direct Operations Center
Wilkes-Barre, PA 18769-0001
Note: Employers with 250 or more W-2 forms are required to file these electronically unless otherwise told so by the IRS. You must register with Business Services Online and verify your employees’ names in order to do this.
The due date for filing both Form W-2 and Form W-3 is January 31.
Should I Handle Payroll Taxes Myself?
Whether you should handle your payroll taxes yourself will depend on your available time, knowledge, and expertise.
Since the process can be quite time-consuming and complicated, you may want to consider a few alternatives. These include:
- Hiring a tax-attorney
- Working with an accountant
- Using a professional payroll service
Working With an Accountant or Tax Attorney
Hiring a specialized tax attorney or accountant to handle your business’s payroll taxes can be a very attractive option, but it is very expensive. This means that it may not be ideal for smaller businesses with tight budgets.
Payroll services can provide a more affordable option. These are offered by specific providers who:
- Calculate your business’s employee pay and taxes
- Send your payroll taxes and filings to the IRS
- Track your employees’ worked hours and import them on your payroll
- Pay your employees
Using a Payroll Service
The process of using a payroll service can be very simple and generally includes:
- Choosing a payroll provider
- Adding the employees on your payroll
- Importing your total hours on the service
- Keeping track of your tax payments and filings
Choosing a Payroll Provider
Each payroll provider offers different packages, features, and prices. This means that you will need to allocate a sufficient amount of time into researching which provider offers the best option for your small business.
The top factors that you will want to consider include:
- Ease of use
- Mobility and app integration
- Availability and type of support
- Customer reviews
Adding Your Employees
In order to process your payroll, you will need to “import” the data of all of your employees in your payroll software. This can be done very quickly, especially when considering that the information needed has already been provided to you in your employees’ W-2 forms.
For example, you will need to include:
- Social Security numbers
- Tax withholding information
- Payroll information (e.g., payment schedule).
For convenience and/or privacy reasons, employers can choose to provide their employees’ emails and names and ask their employees to fill in their information independently.
Importing Your Total Hours
You will need to keep track of your wage records and total hours of work in order to comply with the US Department of Labor.
You will need to access this information and import it into your payroll software before you start using it.
Keeping Track Tax Payments and Filings
This should be done regardless of whether you use a payroll service for your small business or not because it is a legal requirement. You will need to store your tax forms for three years following their creation, although this can vary depending on your state of registration.
There are additional exceptions. For example, you will need to keep records:
- Indefinitely if you filed a fraudulent return
- Indefinitely if you did not file a return
- For seven years if you filed a claim for a loss from bad debt deductions or worthless securities
- For six years if you did not report income that you should have reported
For information, see the IRS’ questions and answers page.
Purpose and Types of Payroll Taxes
Unlike other forms of taxes (e.g., corporation tax, capital gains tax, etc.), most payroll taxes were created to fund certain social costs. These include:
- Social Security
- Healthcare services
- Police departments
- Infrastructure repair
This means that revenue generated from payroll taxes cannot be used as discretionarily as other forms of taxes.
Federal Income Tax
Federal income tax is a progressive tax, meaning that its rate increases as an employee’s annual salary increases.
Federal income tax is the largest source of revenue for the US government. It is consequently used to cover a variety of expenses, including:
- Infrastructure repairs
- Disaster relief
- Public transportation
- Education services
For more information on federal income tax withholdings, see the IRS’ withholding table in Publication 15-T.
Social Security and Medicare Tax
When you withhold a portion of your employees’ salaries for Social Security and Medicare taxes, you are required to contribute a commensurate amount as a supplement.
For example, when you withhold 6.2% of an employee’s salary to cover the cost of Social Security tax, you are required to contribute an additional 6.2%.
This means that the total amount that you will need to withhold is:
- 12.4% for Social Security (6.2% + 6.2%)
- 2.9% for Medicare (1.45% + 1.45%)
Social Security tax is the only payroll tax that has an annual limit. For the year 2022, any revenue over $147,000 per annum is not subjected to Social Security tax.
For more information about Social Security and Medicare taxes, see Publication 15-A on the IRS website.
Additional Medicare Tax
You do not need to withhold Additional Medicare tax for your employees until they have received more than $200,000 in a calendar year.
Individuals’ minimum threshold can be increased depending on their filing status:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household: $200,000
- Qualifying widow(er) with dependent child: $200,000
Keep in mind that you are still required to withhold Additional Medicare tax from employees who have received more than $200,000, even if they are married filing jointly. Such employees will then be able to claim back the 0.9% excess tax between $200,000 and $250,000 at the end of the year.
See the IRS’ Form 8959 guidelines for further instructions.
As an employer, you will likely be required to pay for FUTA and unemployment taxes. These cover the costs of financing workers if they become unemployed in the future.
Unlike other payroll taxes, FUTA tax is not withheld from an employee’s wage. Contrarily, it is solely covered by employers.
More information on FUTA taxes can be found in the “About” section of Form 940.
Self-employment tax is basically the Social Security and Medicare tax that is paid by self-employed persons.
This includes workers that operate as:
- Sole proprietors
- Independent contractors
- Owners of single-member LLCs
- Owners of a partnership
The self-employment tax rate is 15.3%, including the “employer’s contributions” that are fully deductible.
This means self-employment tax includes:
- Social Security (12.4% with the ability to deduct 6.2%)
- Medicare (2.9% with the ability to deduct 1.45%)
You may not be required to pay self-employment tax if you:
- Your net earnings from self-employment are $400 or less.
- You have a church employee income of less than $108.28
- You provide in-house services to the elderly as a caregiver
Frequently Asked Questions
Are payroll taxes regressive?
All payroll taxes besides federal income tax are regressive. This is because their rate stays fixed regardless of a person’s annual salary.
Federal income taxes are progressive because the more money employees make, the more federal income tax they have to pay. This is because the federal income tax rate increases to a larger percentage as salaries increase.
For more information on payroll taxes, see our What Are Payroll Taxes guide.
Are payroll taxes subject to an annual monetary limit?
Generally, no. Workers will be required to pay payroll taxes regardless of how much they make.
There are a few exceptions, however:
- Social Security: These are only paid for the first $147,000 of a person’s annual salary
- Additional Medicare: This is only paid after a person has made more than $200,000. Depending on their filing status, Additional Medicare’s minimum threshold can be increased to $250,000.
What is the purpose of payroll taxes?
Payroll taxes cover certain social costs.
- Healthcare services
- Police and fire brigade departmental costs
- Infrastructure repairs
- Educational subsidies
- Unemployment benefits
- Workers’ compensation
What is the best billing and invoicing software?
Finding the best billing and invoicing software for your business will depend on the following factors:
- Ease of Use
Our guide to the best billing and invoicing software found that the top five billing and invoicing software for small businesses are:
- Square Invoices
- Zoho Invoicing
- Wave Invoicing