A Reference Guide to Employer Payroll Taxes for Small Businesses

For business, payroll taxes are a constant, regardless of how revenue ebbs and flows. For everyone receiving a paycheck, you need to properly calculate and pay employee/employer deductions in a timely manner to stay ahead of the IRS. Here are our pro tips.

stack of payroll taxes

For business, payroll taxes are a constant, regardless of how your revenue ebbs and flows. For everyone receiving a paycheck, you need to properly calculate and pay employee/employer deductions in a timely manner to stay ahead of the IRS.

Businesses must submit payments for withholding taxes either monthly or semi-monthly, depending on the size of the liability. In addition, annual and quarterly reports need to be filed to verify the amounts collected and paid and to make up for any shortfall in payments.

Deductions are made based on employee earnings for nonexempt employees, for both regular and overtime hours worked. For exempt employees, deductions are based on weekly or biweekly pay rates. Here’s what you need to know.

Form 941: Quarterly Tax Report

Employers must report withholding amounts deducted from employees as well as the amount the business has paid on a quarterly basis, using Form 941. The form is due at the end of each month following the previous quarter. For example, for the first quarter of the year (January, February, March) filing must be done by April 30. Form 941 must include details from the reporting period:

  • Total number of employees
  • Total amount of wages paid
  • Total taxes withheld from employees
  • Social Security and Medicare wages and taxes
  • Total amount due
  • Total deposits already made
  • Any taxes still owed

Monthly or Semi-monthly?

Whether you make tax deposits monthly or semi-monthly depends on the amount of taxes withheld in the past. The IRS has a “lookback period” to help you determine when to pay.

The lookback period is typically the 12-month period prior to June 30th of last year. If taxes and withholding totaled less than $50,000 during the lookback period (or you’re a new employer) then you should make tax deposits monthly. If total taxes and withholding were more than $50,000 during the lookback period, deposits should be made semi-monthly (every two weeks).

  • Monthly payments are due the 15th day of the following month, i.e., April 15 for the month of March.
  • Semi-monthly payments are due based on payday schedules:
    • For paydays on Saturday, Sunday, Monday or Tuesday, payments are due the following Friday
    • For paydays on Wednesday, Thursday or Friday, payments are due the following Wednesday

Calculating Payroll Taxes Due

Three types of taxes are withheld from employees and/or matched by employers:  Federal Income Tax, FICA (Federal Insurance Contributions Act, including Social Security and Medicare payments), and state/local taxes. Unemployment insurance is an additional tax that is filed separately.

Federal Taxes

The amount of taxes withheld and due are based on payroll period and status of the employee (married or single). The tables to calculate taxes due can be found here.


Social Security- For 2018, Social Security tax is 6.2% for the first $128,700 of wages. Employees contribute 6.2% and employers match their contribution with an additional 6.2% totaling 14.4% paid.

Medicare- For 2018 the Medicare tax rate is 1.45% for the first $200,000: 2.35% for wages above $200,000. Employees contribute 1.45% (plus 2.35% for anything over $200,000.) and employers match their contribution with an additional 1.45% (plus 2.35% for anything over $200,000) totaling 2.9% (or more) paid.

State/Local Withholding

State and local withholding taxes are additional and typically paid around the same dates as federal withholding. Check with your local government agencies to see when taxes are due and in what amounts.

Form 944: Small Business

Form 944 is an annual (as opposed to quarterly) employer tax form. Smaller businesses– those with combined federal income tax, social security, and Medicare taxes of $1,000.00 per year or less– are allowed to pay total taxes annually (instead of monthly or semi-monthly) using Form 944.

Form 940: FUTA

Federal unemployment tax reporting must be submitted annually using Form 940. For employers whose FUTA (Federal Unemployment Tax Act) tax is less than $500 per year, payments can be made annually. For those whose liability is over $500 per year, quarterly payments are required.

FUTA is paid for all employees with a few exceptions of household, agricultural, and farm workers. The FUTA rate for 2018 is 6% of the first $7,000 of each employee’s wages. If you are required to pay state unemployment taxes, you may be able to reduce the percentage FUTA you pay by the amount of the state tax, up to 5.4%. For example, if you pay 5% SUTA, your FUTA will be reduced to 1%.

Employers must be diligent in totaling employee hours. Miscalculating hours and/or overtime hours could result in fines and penalties, in addition to back wages. Whether employers calculate their own payroll taxes or use an outside service, it’s important to assure all taxes and deductions are made and paid in a timely manner and based on all wages due.


Might also interest you