Tag: tax compliance

Summary

• Payroll taxes are just one part of running payroll, but it’s a significant part. It’s a year-round responsibility that involves calculating withholdings, filing forms, and meeting deposit deadlines.
• Even small mistakes can lead to penalties, such as missing a deadline or misclassifying wages.
• A few smart practices and the right payroll software can go a long way.

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Payroll taxes are just one part of running payroll, but they’re a significant part. While payroll processing covers everything from tracking hours to issuing paychecks, the tax side alone spans multiple steps before, during, and after payday. You need to set up the correct withholdings, calculate deductions correctly for each run, file required forms, and meet deposit deadlines. 

Paying payroll taxes is more than just sending contributions to the IRS every now and then. Payroll tax obligations can be extremely complex, but a few practical tips can help business owners stay compliant and avoid any surprises.

Here are some best practices for paying payroll taxes: 

1. Know what taxes you’re actually responsible for

There are different types of payroll taxes that employers must withhold and process from employee paychecks, including: 

• Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA)
• Federal Unemployment Tax Act (FUTA) contributions – fund unemployment benefits for eligible workers
• State and local taxes
• Employer-side contributions – many of these taxes have an employer’s share, meaning you need to match what the employee pays (as with Social Security and Medicare).

Some of these taxes are withheld as tax deductions from employee wages, while others are paid directly by the employer.

Most of these are based on employee wages, so it’s important to understand which taxes apply, how they’re calculated, and what portion your business is responsible for. Before anything else, you need to know what taxes you need to collect and remit, both on behalf of your employees and from your business directly.

For federal income tax withholding, that process starts with Form W-4, which each employee fills out when they’re hired. It tells you how much tax to withhold based on filing status, dependents, and any additional withholding requests. Keeping this information up to date is key to avoiding under- or over-withholding. 

Also read: What are different payroll deductions? Taxes, benefits, and more

2. Track hours and wages accurately

Accurate time tracking is the foundation of tax compliance, especially when you’re dealing with hourly employees. Every hour worked directly affects how much you withhold for taxes and how much you need to report. These hours contribute to each employee’s taxable wages or the portion of their earnings that payroll taxes are calculated on.

Small errors throw off tax calculations and lead to issues. Ensure you have a system that accurately captures: 

• Clock-ins and clock-outs
• Breaks and unpaid meal periods
• Overtime
• Shift differentials or special rates

3. Register with federal, state, and local tax agencies

You need to be registered with the right government agencies before you can pay or file for anything. You can start with:

• Employee Identification Number (EIN) – through the IRS
• State employer registration: Usually done through the state’s Department of Revenue or Labor
• Local registration: Required in some cities for payroll taxes or occupational licenses

If you employ workers in multiple states or eventually open up new locations, you would most likely need to register for each one separately. You need to do this first and foremost, as registration can take time to process. 

4. Know your deposit schedule 

Payroll taxes are deposited regularly throughout the year. The scheduled deadline depends on how much payroll tax you reported in the past. 

Under IRS rules, your deposit schedule is based on a lookback period, which is a 12-month window that determines your tax liability. 

For most employers who file Form 941, the lookback period covers the 12 months from July 1 two years ago through June 30 of last year.

Here’s an example: 

For 2025 deposit schedules, the lookback period is July 1, 2023 to June 30, 2024. The deposit will be:

• Monthly: If you reported $50,000 or less in taxes, you must deposit by the 15th of the following month
  
• Semiweekly: If you reported more than $50,000, you must deposit depending on what day you pay your employees. So if your payday falls on:
  
  • Wednesday, Thursday, or Friday, the deposit is due by the following Wednesday.
  • Saturday, Sunday, Monday, or Tuesday, the deposit is due by the following Friday. 

If you filed Form 944 in either of the previous two years or you’re filing it in the current year, the lookback period is different. It would be the entire calendar year two years before the deposit year. For instance, the lookback period is calendar year 2023 for 2025 deposits. 

It’s also important to take note of the following exceptions:

• If your total quarterly tax liability is under $2500, you can pay the tax with Form 941 instead of making regular deposits. 
  
• If you accumulate $100,000 or more in a single day, you must deposit the next business day and will become a semiweekly depositor moving forward.

5. Adhere to tax filing deadlines

Depositing taxes is only half of the payroll tax equation. The other equally important part is filing forms that officially report what you withheld, what you paid, and when. Filing forms on time is as crucial as paying taxes themselves. It’s important to note that you could be subject to penalties for late filings, even if you already paid what you owe. 

Here are key forms employers must know:

Form 941: Employer Quarterly Federal Tax Return

• Reports federal income tax withheld from employees, plus Social Security and Medicare taxes
• Filed four times a year (end of April, July, October, and January)
• The most common form for employers with hourly teams

Form 940: Federal Unemployment Tax (FUTA) Tax Return

• Filed annually
• Reports how much you owe for federal unemployment taxes
• Required even if you qualify for the 0.6% reduced FUTA rate

Form W-2: Wage and Tax Statement

• Sent to each employee every January
• Summarizes their total earnings and withholdings for the year
• Must also send Form W-3  to the Social Security Administration

Form 944: Annual Federal Tax Return (for smaller employers)

• Some small businesses file Form 944 instead of 941 if their total annual liability is under $1,000
• Filed once a year, not quarterly
• The IRS must notify you in writing if you’re eligible to use this form.

Form 1099-NEC: Nonemployee Compensation

• If you paid contractors $600 or more during the year
• Must be filed by January 31 and submitted to the IRS and contractors
• Not a payroll tax form per se, but still part of year-end wage reporting

Meanwhile, every state with income or unemployment tax has its own set of required forms, which is usually a mix of: 

• Quarterly state withholding returns
• Unemployment insurance wage reports
• Annual reconciliation forms
• Copies of W-2s or 1099s

Deadlines and formats vary. If you operate in multiple locations, it’s crucial to track and stay on top of these tax due dates aside from federal requirements.

6. Don’t overlook state and local tax rules 

Once you’ve figured out your federal taxes, you’ll also need to calculate and pay state-level obligations, such as state unemployment tax, which varies by location and employer history. State and local rules are equally crucial as federal payroll taxes, especially for hourly or multi-state teams. 

Here are some examples:

• In Massachusetts, new non-construction employers pay 2.13% in SUI rate, applied to the first $15,000 in wages per employee. If you’re in construction, the default rate is 5.45%, also applied to the first $15,000 in wages per employee. 
  
• New York imposes the MCTMT (Metropolitan Commuter Transportation Mobility Tax). Suppose your total quarterly payroll for employees working in the MCTD (Metropolitan Commuter Transportation District,  including NYC, Long Island, and parts of the Hudson Valley) exceeds $312,500. In that case, you’re required to pay an additional payroll tax ranging from 0.11% to 0.60%, depending on your total payroll.
  
• Reciprocity agreements can affect income tax withholding. If an employee lives in one state but works in another, a reciprocity agreement may let you withhold income tax only for the employee’s home state.

Employers must be proactive to stay up-to-date with these rules. It’s best practice to review SUI notices every year, monitor local tax obligations, and understand residency versus work state rules. 

7. Automate where you can

Running payroll manually is doable, but it’s very risky, especially when your team grows. You can face audits and fines due to mistakes in tax withholdings, errors in tax forms, or late payments. 

If your workforce clocks in and out, works variable shifts, earns multiple pay rates, or moves across locations, automation helps prevent errors that are otherwise easy to miss. 

Use payroll software that syncs directly with your time and attendance tracking and scheduling tools so that:

• Worked hours, breaks, and overtime flow automatically into payroll
• Pay rates, roles, and job codes are applied consistently
• There’s no need for manual re-entry or patching together spreadsheets

Think of automation as both a time-saver and compliance safeguard. The more complex your operations, the more valuable automation becomes. Payroll software helps reduce the risk of costly mistakes, from inaccurate hours to missed employment tax filings.

Stay on top of payroll and tax calculations with Workforce.com

Workforce.com connects scheduling, time tracking, and payroll, so every hour worked, break taken, and pay rate used is accurately calculated. Learn more about payroll with Workforce.com. Book a demo today.

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FAQ: Payroll Taxes for Employers

Do I have to pay payroll taxes if I only hire part-time employees?

Yes. Even if your employees work part-time, you’re still responsible for withholding and remitting payroll taxes. This includes Social Security tax, Medicare tax, federal and state income taxes (if applicable), and unemployment taxes.

Do I need to pay payroll taxes for independent contractors?

You don’t withhold income tax or pay Social Security, Medicare, or unemployment taxes for independent contractors or self-employed individuals. Instead, they’re responsible for handling their own taxes and typically receive a Form 1099-NEC, not a W-2.

What happens if I miss a payroll tax deposit deadline?

Missing a deposit or filing deadline can result in late fees, penalties, and interest from the IRS or your state agency. In some cases, repeat violations can trigger audits or legal action. Automating your payroll tax calculations can help avoid these risks.

What is EFTPS and do I need it for payroll taxes?

Yes, the Electronic Federal Tax Payment System (EFTPS) is the IRS’s official platform for submitting federal tax payments, including payroll taxes. Employers are required to use EFTPS to deposit withheld income tax, Social Security, and Medicare taxes.

Do payroll taxes help fund unemployment benefits?

Yes. Payroll taxes like FUTA (federal) and SUI (state) are used to fund unemployment benefits for eligible workers who lose their jobs. These are typically employer-paid and are required in almost every state.

What is the Additional Medicare Tax, and who pays it?

The Additional Medicare Tax is a 0.9% tax on wages over $200,000 per year, paid only by employees. Employers are required to begin withholding it once an individual employee’s wages exceed that threshold — no employer match is required.

Do I need to e-file payroll tax forms?

In most cases, yes. Employers are generally required or encouraged to electronically file payroll tax returns like Forms 941 and 940 directly with the IRS. Wage reporting forms, such as Form W-2, are filed electronically with the Social Security Administration (SSA). E-filing helps ensure timely processing and reduces errors.

How does payroll software help calculate payroll taxes?

Payroll software can handle the most complex parts, such as calculating withholdings and applying the correct tax rates. Workforce.com helps you stay accurate and compliant by syncing hours, pay rates, and locations directly into your payroll calculations, so taxes are easier to manage and less prone to error.