Payroll taxes are the most frequently mishandled area of small business compliance. Unlike income taxes, payroll taxes must be remitted on strict schedules, and the penalties for late deposits are severe. Getting this right is not optional—it is an obligation that comes the moment you have your first employee.
What You Must Withhold
As an employer, you must withhold federal income tax (based on employee W-4), the employee portion of Social Security (6.2% up to the wage base), and the employee portion of Medicare (1.45%). You also owe the employer match of Social Security (6.2%) and Medicare (1.45%) from your own funds—these are not withheld from employees.
Deposit Schedules
Deposit frequency depends on your tax liability. If your total tax liability in the lookback period was $50,000 or less, you are a monthly depositor. If it was more than $50,000, you are a semi-weekly depositor. The IRS expects deposits to be made on time regardless of your filing frequency.
Key Takeaways
- Employer payroll taxes include both the withheld employee portion and a matching employer contribution.
- Late deposit penalties start at 2% and scale up to 15% depending on how late the deposit is.
- The IRS's Trust Fund Recovery Penalty holds individual business owners personally liable for willful failure to deposit withheld taxes.
