There are a lot of things to keep track of as a business owner, with payroll taxes being one of them. The IRS requires you to withhold payroll taxes on your employees’ earnings and also contribute payroll taxes. This process can be complicated if you aren’t prepared. Read on to learn the difference between income and payroll taxes, how to pay payroll taxes, how to calculate payroll, your payroll tax deposit schedule, and more.
- Understand payroll vs income taxes: payroll taxes fund Social Security and Medicare and are shared between employer and employee.
- Calculate FICA: withhold Social Security 6.2% and Medicare 1.45% from wages; employer matches each amount.
- Withhold and secure funds: deduct employee share, set aside employer share, consider a separate payroll account or full-service payroll provider.
- Report and file: submit Form 941 quarterly or Form 944 annually as instructed, via paper or e-file.
- Deposit schedule and records: use EFTPS, deposit monthly or semi-weekly based on lookback liability, and keep detailed payroll records.
Quick answer: How to pay payroll taxes
- Calculate FICA on taxable wages (Social Security is 6.2% each up to the annual wage base; Medicare is 1.45% each, plus 0.9% Additional Medicare for employees who earn above the threshold).
- Withhold the employee share and set aside your matching employer share.
- Report federal income tax and FICA tax using Form 941 (quarterly) or Form 944 (annually if the IRS instructs you).
- Deposit taxes via EFTPS on your assigned monthly or semiweekly schedule (watch the $100 next-day rule).
- Keep detailed payroll records and issue year-end forms (W-2), and file FUTA on Form 940 annually.
Before you start: Payroll tax setup checklist
- Get an Employer Identification Number (EIN) from the IRS.
- Collect Form W-4 from each employee (and any state withholding certificates).
- Set up state unemployment and withholding accounts (if applicable).
- Gather I-9 documentation for work eligibility verification.
- Decide whether to use payroll software or a full-service provider to automate calculations, filings, and deposits.
What’s the difference between payroll and income taxes?
Employment taxes include both payroll taxes and income taxes. It’s important to understand the difference between income tax and payroll tax. Payroll taxes are shared with your employee. Both of you contribute the same percentage based on employee wages. Unlike income taxes, payroll taxes fund social insurance programs.
Income tax is paid strictly by the employee. This tax includes federal income tax and may also include state and local income taxes. Income tax is based on an employee’s W-4 and filing status.
There are more taxes that you’ll have to keep track of, like FUTA (Federal Unemployment Tax Act) tax. For this article, we’re going to focus only on paying payroll taxes.
What are payroll taxes?
Payroll taxes include the Federal Insurance Contributions Act (FICA) tax. FICA tax has two components: Social Security tax and Medicare tax. FICA tax benefits retirees, the disabled, and children.
Social Security provides benefits for retired workers and:
- The dependents of retired workers
- Disabled workers and their dependents
- Survivors of deceased workers
Medicare taxes benefit people 65 years or older, children with disabilities, and qualifying health conditions regardless of age.
Related payroll filings and deadlines
- Form 940 (FUTA): File annually by January 31; deposit FUTA at required thresholds during the year.
- Forms W-2 and W-3: Provide Form W-2 to employees by January 31 and file W-2 (Copy A) with Form W-3 to the Social Security Administration by January 31.
- State and local forms: Register, withhold, deposit, and file per your state and local schedules
How to pay payroll taxes
Now that you know what makes up payroll taxes, you’ll need to know the next steps to take. To pay payroll taxes, you must:
How to pay payroll taxes:
- Calculate FICA tax
FICA taxes include Social Security and Medicare, and you and your employee each pay half (15.3% total).
Social Security: 6.2% each (12.4% total)
– Multiply the employee’s gross taxable wages by 0.062.
– Only apply this up to the Social Security wage base.
Medicare: 1.45% each (2.9% total)
– Multiply gross taxable wages by 0.0145.
– There is no wage base limit. You may also need to withhold an additional 0.9% for high earners.
Withhold the employee’s share from their paycheck and match it with your employer contribution. - Withhold the tax
After calculating the taxes:
– Withhold the employee’s portion from their wages.
– Set aside your matching employer portion.
– Keep funds in a secure account (many employers use a separate payroll bank account).
– If you use full-service payroll, the provider typically handles this step. - Report the withheld tax at the proper time
Report federal income tax and FICA taxes to the IRS using:
– Form 941 (quarterly): most common
– Form 944 (annually): only if instructed by the IRS
You can file by paper or e-file. - Deposit the tax to the proper agencies
Deposits are made on a monthly or semiweekly schedule (set by your lookback period), while
filings are quarterly (Form 941) or annually (Form 944).
Your deposit schedule depends on your total tax liability during your lookback period.
– Under $50,000: Deposit monthly (by the 15th of the following month).
– Over $50,000: Deposit semi-weekly based on payroll dates.
Make all federal tax deposits using the Electronic Federal Tax Payment System (EFTPS).
$100,000 next-day rule: If you accumulate $100,000 or more in employment tax liability on any day, deposit the taxes by the next business day and become a semiweekly depositor for the rest of the year and the following year.
Small liability option: If your total Form 941 tax liability for the quarter is under $2,500, you may be able to pay with your quarterly return instead of making separate deposits (see IRS instructions). - Keep detailed records
Maintain accurate payroll records, including:
– Employee pay rate
– Hours worked
– Gross pay
– Withholdings
– Net pay
– Copies of W-2s, W-4s, and applicable state/local forms
Good recordkeeping ensures compliance and prepares you for any agency requests.
Keep federal employment tax records for at least 4 years after the date the tax becomes due or is paid (whichever is later). Some businesses keep payroll records 5–7 years to satisfy additional state or audit needs.
Pretax deductions (e.g., 401(k), Section 125 health premiums) reduce taxable wages for some taxes; confirm whether each deduction is pre- or post-tax for federal income tax, Social Security, and Medicare before calculating withholdings.
- Easy onboarding with our setup wizard
- Free USA-based support
- Free direct deposit
1. Calculate FICA tax
FICA tax is shared evenly between you and your employee (you both pay the same percentage of employee wages). The total FICA rate is 15.3%, which breaks down to 12.4% for Social Security and 2.9% for Medicare.
For Social Security: You and your employee each pay 6.2% (half of 12.4%).
To calculate your portion of Social Security, multiply the employee’s gross taxable wages by .062. This is also the amount you must withhold from employee wages.
Only withhold and contribute Social Security taxes on wages up to the Social Security wage base.
For Medicare: You and your employee each pay 1.45% (half of 2.9%).
To calculate your portion of Medicare, multiply your employee’s gross taxable wage by .0145. This is also the amount you must withhold from employee wages.
There is no wage base for Medicare taxes. You may also need to withhold an additional 0.9% on wages earned above the additional Medicare tax threshold. Remember: Some pretax benefits reduce wages for federal income tax and/or FICA differently. Confirm each benefit’s taxability before calculating.
Let’s take a look at an example.
Maria’s annual pay for 2021 is $60,000. Maria is paid biweekly. Her biweekly check, before taxes, would total approximately $2,307.69 ($60,000 / 26). Here’s how you’ll calculate FICA tax off of her biweekly gross wages.
For Social Security, multiply her gross wages by .062.
$2,307.69 x .062 = $143.07
For Medicare, multiply her gross wages by .0145.
$2,307.69 x .0145 = $33.46
Adding these two sums together will give us Maria’s total FICA tax.
$143.07 + $33.46 = $176.53
You’ll withhold $176.53 from Maria’s paycheck and make a matching contribution of $176.53 for a total of $353.06.
2. Withhold the tax
After you know the amount of taxes to withhold, keep hold of it until you are ready to make your deposit. Likewise, set aside your employer payroll tax obligation, too.
However you choose to store your employee taxes, make sure that it is safe and easy for you to understand and use. You may want to use a separate business or payroll bank account. If you use full-service payroll, the provider will handle this for you.
3. Report the withheld tax
You must report the withheld tax to the IRS using Form 941 or 944. You can do payroll tax filing on paper or through e-file.
Due dates: Form 941 is due by the last day of the month following the end of each quarter (April 30,
July 31, Oct 31, Jan 31). Form 944 (if eligible and instructed by the IRS) is generally due January 31.
Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, report both federal income tax and FICA tax.
Of the two, Form 941 is the most common. The IRS will let you know if you need to use Form 944.
4. Deposit the tax to the proper agencies
Your deposit schedule is determined by the total tax liability reported on Form 941, line 12, or Form 944, line 9, during your lookback period (not by your filing frequency).
Your lookback period helps you figure out the deposit schedule for payroll taxes. A lookback period operates by adding up your quarterly or annual tax liability, the sum of which decides your deposit schedule. For instance, if your total tax liability is under $50,000, you’ll deposit every month. Conversely, if your total tax liability is over $50,000, you’ll deposit semi-weekly.
Here’s how it works.
If you use Form 941, report your taxes quarterly. This system of dividing the year into fiscal quarters will be the same way your lookback period operates. Your lookback period starts July 1 and ends June 30 the next year. So, if you wanted to determine your deposit schedule for 2026, your lookback period would begin July 1, 2024 and end June 30, 2025. Here are the quarters your lookback period would cover for a 2023 deposit schedule:
| Q3 (2024) | Q4 (2024) | Q1 (2025) | Q2 (2025) |
|---|---|---|---|
| July 1-Sept 30 | Oct 1-Dec 31 | Jan 1-Mar 31 | Apr 1-June 30 |
By adding up the tax liability of each quarter, you can find your total tax liability for the year.
If you use Form 944, things are more straightforward. Because Form 944 reports your taxes on an annual basis, you don’t have to add up the quarters to understand your total tax liability. Instead, you’ll look at your annual tax liability. But, it can still be a bit tricky.
If you’re using Form 944 to file in the current year or have used it in the past two years, you’ll need to look at your annual tax liability from two years before your current filing period. Filing for 2026? Look at your annual tax liability for 2024.
Once you add up your tax liability using either the quarter or annual method, you’ll be able to find when you need to make your deposits. If your annual tax liability is:
- Under $50,000, you’re a monthly depositor. Deposit employment taxes on wages paid during a month by the 15th day of the following month.
- Over $50,000, you are a semi-weekly depositor. Deposit employment taxes for wages paid on Wednesday, Thursday, and/or Friday by the following Wednesday. And, deposit taxes for wages paid on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.
Use the Electronic Federal Tax Payment System for all federal tax deposits.
Don’t miss the $100,000 next-day rule: If you accumulate $100,000 or more in employment tax liability on any day, deposit the taxes by the next business day and become a semiweekly depositor for the rest of the year and the following year.
5. Keep detailed records
Even after everything is properly withheld, reported, and deposited, you still have a bit of work to do. Keep detailed records as you go about your work. The information needed to process payroll correctly may also be requested by federal or state agencies. It’s best to be prepared.
Keep track of:
- Employee pay rate
- Hours worked
- Gross pay
- Withholdings
- Net pay
Also, make copies of all employee tax information (e.g., employee W-2s, W-4s, and state and local forms. Retain supporting schedules, deposit confirmations, and EFTPS receipts.
Common payroll tax mistakes to avoid
- Missing the look back period assignment and depositing on the wrong schedule.
- Forgetting the $100,000 next-day deposit requirement
- Misclassifying pre-tax vs. post-tax deductions, causing incorrect taxable wages.
- Skipping state registrations and deposits (state penalties can be steep).
- Waiting until quarter-end to reconcile (reconcile each payroll instead).
Explore Patriot Software
- Patriot’s Basic Payroll calculates payroll and payroll taxes. You handle filings and deposits.
- Patriot’s Full Service Payroll calculates, files, and deposits your federal, state, and local payroll taxes for you, plus year-end W-2s, so you can stay compliant with IRS schedules.
Compare both payroll options here.
FAQs: Paying payroll taxes
Most employers deposit monthly or semiweekly based on their IRS lookback period. Deposits are
made via EFTPS. If your quarterly Form 941 liability is under $2,500, you may be able to pay with your return. If you hit $100,000 in liability on any day, deposit by the next business day.
It’s the 12-month period the IRS uses to assign your deposit schedule. For 941 filers, it runs from July 1 of the prior year to June 30 of the current year, using the four prior quarters’ tax liability.
Yes. FUTA is separate from FICA. File Form 940 annually by January 31 and make required FUTA
deposits during the year when you meet liability thresholds.
Provide Form W-2 to employees and file Forms W-2 and W-3 with the SSA by January 31.
Keep federal employment tax records at least 4 years after the due date or payment date (whichever
is later).
The IRS may assess penalties and interest. Make the deposit as soon as possible, correct your
liability on Form 941 or 944 if needed, and consider using full-service payroll to prevent future issues.
Pretax deductions can reduce taxable wages for federal income tax and/or FICA depending on the plan type (e.g., Section 125 health premiums are typically pretax for both federal income and FICA taxes; 401(k) deferrals are pretax for federal income tax but generally subject to FICA).
States set their own registration, withholding, deposit, and filing rules. Check your state revenue and
unemployment agencies for schedules and requirements (e.g., electronic filing).
This article has been updated from its original publication date of July 13, 2022.
This is not intended as legal advice; for more information, please click here.
