Payroll Taxes 101: Everything Beginners Need to Know (2026)
Whether you’re launching a payroll product, onboarding your first employees, or trying to understand how payroll taxes work at a fundamental level, this guide covers the essentials. We’ll walk through every type of payroll tax — federal income tax, Social Security, Medicare, FUTA, state income tax, SUI, and local taxes — explain the key forms and filing deadlines, and cover the deposit rules that keep employers compliant.
For many owners, taxes can be confusing. Sure, you know how to grow and market your business from day to day, but do you know which tax withholding forms have to be submitted and when? Whether you handle your taxes yourself, employ an in-house accountant, or outsource the whole deal, you'll be in better control if you familiarize yourself with the basics.
Form W-4
Upon hiring each and every new employee, you must have them fill out a W-4 – or the Employee’s Withholding Allowance Certificate. This will help you know exactly how much income tax to withhold from an employee’s wages. The amount is based on his or her filing status and withholding allowances, and remains in effect until your employee provides a new one. However, it’s up to the employee to decide if and when to do this. For a deeper dive into federal withholding methods, see our comparison of the wage bracket method vs. percentage method
Social Security and Medicare (FICA)
The Federal Insurance Contributions Act requires employers withhold social security, Medicare, and a Medicare surtax (only applicable to employee earning over $200,000) from each employee paycheck AND pay their employer portion. The rates for the employer portion are: 6.2% (social security) and 1.45% (Medicare). Social security taxes help fund the retirement program with the same name, and Medicare taxes fund the national social insurance program with the same name, that provides healthcare for over 55 million Americans. For the current Social Security wage base and COLA history, see our Social Security update guide.
Depositing federal taxes
Companies are required to deposit federal income taxes withheld, social security taxes and Medicare taxes through the U.S. Department of Treasury’s Electronic Federal Tax Payment System. (Checks and envelopes are now relics of the 20th century!) They must deposit these taxes on a monthly or semi-weekly basis, depending on the total tax liability you reported on Form 941 during a lookback period (beginning July 1 and ending June 30 of the following year). It is NOT determined by how often you pay your employees. Form 941 is an Employer’s Quarterly Federal Tax Return and is used to report withholding taxes. To ultimately deposit, you will use EFT, or an electronic deposit. It’s required by the IRS. For the full deposit schedule including penalty amounts and the $100,000 next-day rule, see our employment tax deposit guide.
Depositing FUTA taxes
Companies must make a deposit of unemployment insurance as required by the Federal Unemployment Tax Act (FUTA). They are also required to file Form 940, Employer's Annual Federal Unemployment Tax Return. This transaction takes place in the quarter during which the total tax due exceeds $500. The FUTA deposit is due by the end of the month following the end of the quarter. Because FUTA tax is not withheld from your employees’ wages, all companies have to do is file Form 940. ONLY pay your employer taxes. Do NOT collect on your employees’ wages. Some lucky states must collect State Unemployment Tax (SUTA) as well. Each state determines its own rate, and the amount goes to funding the state unemployment insurance system.
Depositing federal and state taxes is integral. If you’re late to deposit federal taxes, the IRS imposes a deposit penalty that adds up as time passes. For example, a 2% penalty rate is imposed on deposits made one to five days late, while a 10% rate is given to those who are 16 or more days late. For a complete breakdown of FUTA rates, deposit schedules, and credit reduction states, see our FUTA compliance guide.
Reporting federal taxes
Generally, companies must file Form 941, Employer’s Quarterly Federal Tax Return, each quarter to report employees’ federal income tax withheld and Social Security, Medicare, sick pay, and unemployment benefits. This form is also used for employers to pay their portion of social security and Medicare. However, there are a few instances in which companies might use a different form. For example, companies reporting agricultural wages will use Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. There are other variations: Businesses may receive a written notification to file annually using Form 944, rather than quarterly with Form 941. And some corporations will need to file Form 945, Annual Return of Withheld Federal Income Tax.
Form W-2
Anyone who’s ever been employed is likely familiar with W-2 forms. Companies send them out, and generally begin distributing in January. Every employer who pays remuneration for services performed by a true employee (not a contractor) must file a W-2 for each employee. Copy A of the W-2 goes with Form W-3 to the Social Security Administration, while Copy 1 goes to the employee’s state or local tax department. These forms show the amount of taxes withheld from an employee’s paycheck for the entire year.
Form 1099
The Form 1099-MISC is another common form, which serves as an equivalent to the Form W-2 in industry-based or vertical payroll for independent contractors, freelancers, and any other seasonal or non-employee workers. Companies that paid a non-employee $600 or more during a given year are required to provide that person with a completed 1099-MISC by January 31 of the year following payment. It must then send a copy to the IRS by Feb. 28 or, if it uses the IRS FIRE system to file electronically, by March 31.
To fully grasp all your depositing and reporting responsibilities as an employer, business owners can start by skimming Publication 15 (Circular E), Employer’s Tax Guide. Learn more about classifying employees correctly.
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What are payroll taxes?
Payroll taxes are all taxes associated with an employee’s paycheck. They include federal income tax withholding, Social Security (6.2% each for employer and employee), Medicare (1.45% each), FUTA (6.0% on the first $7,000, employer only), state income tax (varies by state), state unemployment insurance (SUTA, varies by state), and local taxes (varies by jurisdiction). Some are paid by employees through withholding, some by employers, and some are shared.
What payroll forms do employers need to file?
Key forms include Form 941 (quarterly federal tax return), Form 940 (annual FUTA return), Form W-2 (annual wage statement for employees), Form W-4 (employee withholding certificate), Form I-9 (employment eligibility verification), and state equivalents. Small employers with annual liability under $1,000 may file Form 944 annually instead of quarterly 941s.
How often do employers deposit payroll taxes?
It depends on the size of your tax liability. Monthly depositors (liability of $50,000 or less in the lookback period) deposit by the 15th of the following month. Semi-weekly depositors (more than $50,000) deposit within days of each payday. FUTA deposits are quarterly if liability exceeds $500.
What happens if you make a payroll tax error?
Errors can result in underpaid employees, incorrect tax withholding, W-2 corrections, IRS penalties for late deposits (2-15% of the shortfall), and potential back-wage claims. The sooner an error is caught and corrected, the lower the exposure.