Payroll 101: The Beginner’s Guide to Payroll Taxes and Forms

Managing payroll can be overwhelming for business owners, especially when it comes to taxes and forms. While you may be confident in running your business, understanding payroll tax requirements is essential to staying compliant. Whether you handle payroll yourself, hire an accountant, or outsource the process, knowing the basics will keep you in control.

Form W-4: Employee’s Withholding Certificate

When hiring a new employee, they must complete Form W-4, also known as the Employee’s Withholding Certificate. This form determines how much federal income tax should be withheld from their paycheck based on their filing status and withholding allowances. Employees can update this form at any time, but it is their responsibility to do so.

Social Security and Medicare (FICA) Taxes

Employers are required to withhold Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). In addition, employers must contribute their share of these taxes. The current rates are:

  • Social Security: 6.2% from the employee and 6.2% from the employer
  • Medicare: 1.45% from the employee and 1.45% from the employer
  • Additional Medicare tax: 0.9% for employees earning over $200,000 (employers do not match this tax)

Social Security taxes fund retirement benefits, while Medicare taxes help cover healthcare costs for eligible individuals.

Depositing Federal Taxes

Employers must deposit withheld federal income taxes, Social Security, and Medicare taxes using the U.S. Department of Treasury’s Electronic Federal Tax Payment System (EFTPS). The deposit schedule—monthly or semi-weekly—depends on the total tax liability reported on Form 941 during the lookback period (July 1–June 30 of the previous year). The payment schedule is not based on payroll frequency.

Employers must also submit Form 941, the Employer’s Quarterly Federal Tax Return, to report withheld taxes and their share of Social Security and Medicare contributions.

Federal Unemployment Tax (FUTA)

Employers must pay the Federal Unemployment Tax (FUTA), which funds unemployment benefits. The tax is not deducted from employee wages. Instead, employers:

  • Deposit FUTA taxes quarterly if their tax liability exceeds $500
  • File Form 940, the Employer’s Annual Federal Unemployment Tax Return, at the end of the year

Some states also require employers to pay a State Unemployment Tax (SUTA), with rates determined at the state level.

Penalties for Late Deposits

Timely payment of federal taxes is crucial. The IRS imposes penalties for late deposits:

  • 2% for deposits 1–5 days late
  • 5% for deposits 6–15 days late
  • 10% for deposits 16 or more days late

Avoiding these penalties ensures compliance and prevents unnecessary financial strain on your business.

Reporting Federal Taxes

Most businesses must file Form 941 quarterly to report federal income tax withheld, as well as Social Security and Medicare taxes. However, some businesses may need to file different forms:

  • Form 943: Used by agricultural employers
  • Form 944: Filed annually by certain small employers (if notified by the IRS)
  • Form 945: Filed by businesses reporting non-payroll income tax withholding

Form W-2: Wage and Tax Statement

Employers must provide each employee with a Form W-2, summarizing their annual wages and tax withholdings. Distribution typically begins in January, with employers sending:

  • Copy A to the Social Security Administration (with Form W-3)
  • Copy 1 to state or local tax agencies
  • Copies B, C, and 2 to the employee

This form is crucial for employees when filing their personal tax returns.

Form 1099: Reporting Independent Contractor Payments

Businesses that pay independent contractors $600 or more in a year must issue Form 1099-NEC (formerly part of Form 1099-MISC). Key deadlines include:

  • January 31: Provide Form 1099-NEC to contractors
  • February 28: Submit to the IRS (March 31 if filing electronically)

This form helps the IRS track non-employee compensation and ensures proper reporting.

Staying Informed

Payroll taxes and forms can be complex, but staying informed helps you manage compliance smoothly. The IRS provides resources like Publication 15 (Circular E), Employer’s Tax Guide, to help business owners understand payroll tax responsibilities.

By mastering these basics, you can confidently manage payroll taxes and avoid costly mistakes. Whether you handle payroll internally or seek professional assistance, knowing the essentials ensures smooth operations and compliance with tax laws.