Is My Payroll in Compliance?
A complete, IRS-verified breakdown of every employment tax employers must withhold, deposit, and report — with exact rates, deadlines, and a compliance checklist.
As an employer, you are legally responsible for withholding, depositing, and reporting several types of federal employment taxes. Missing any one of these obligations — even by a few days — can trigger IRS penalties that compound quickly. This guide breaks down every tax you owe, every form you must file, and every deadline you cannot miss.
Federal Income Tax
Employers must withhold federal income tax from employees’ wages based on each employee’s Form W-4 and the withholding tables in IRS Publication 15-T. The amount varies by employee earnings and filing status.
Social Security Tax (FICA)
6.2% withheld from employee + 6.2% paid by employer = 12.4% total. Applies only on the first $176,100 of wages per employee in 2025 (wage base limit). No Social Security tax above that threshold.
Medicare Tax (FICA)
1.45% withheld from employee + 1.45% paid by employer = 2.9% total. No wage base limit — Medicare tax applies to all wages with no cap.
Federal Unemployment Tax (FUTA)
Paid only by the employer — never withheld from employees. Applies to the first $7,000 of each employee’s wages per year. Most employers receive a credit of up to 5.4% for timely state unemployment tax payments.
Official IRS Rates — Tax Year 2025 (per Publication 15 & IRS.gov)
| Tax | Employee Rate | Employer Rate | Wage Base / Limit | Who Pays |
|---|---|---|---|---|
| Federal Income Tax Withholding | Varies | N/A | No cap | Employee |
| Social Security Tax | 6.2% | 6.2% | First $176,100 (2025) First $184,500 (2026) |
Both |
| Medicare Tax | 1.45% | 1.45% | No cap — all wages | Both |
| Additional Medicare Tax | 0.9% | No match | Wages over $200,000 | Employee only |
| FUTA Tax | $0 | 6.0% (0.6% effective with credit) |
First $7,000 per employee | Employer only |
The IRS determines your deposit schedule based on your total tax liability during a lookback period (July 1 – June 30 of the prior two years). There are two schedules for Form 941 taxes:
📅 Form 941 Deposit Schedules (Federal Income Tax + Social Security + Medicare)
Your schedule is assigned by the IRS based on your lookback period liability — you cannot choose it.
FUTA Deposit Rule (Form 940)
FUTA tax is deposited quarterly — but only when your cumulative FUTA liability exceeds $500. If it stays at $500 or less at the end of any quarter, carry it forward to the next. All deposits must be made electronically via EFTPS.
941
Employer’s Quarterly Federal Tax Return
Reports federal income tax withheld, Social Security tax, and Medicare tax for each quarter. Filed by most employers with employees. Must be filed every quarter even if no taxes were withheld.
📅 Due: April 30 • July 31 • October 31 • January 31
940
Employer’s Annual Federal Unemployment (FUTA) Tax Return
Reports and reconciles FUTA tax for the calendar year. Filed annually. Required if you paid wages of $1,500 or more in any quarter, or had at least one employee for part of 20 or more weeks during the year.
📅 Due: January 31 (or February 10 if all deposits made on time)
W-2
Wage and Tax Statement
Must be issued to every employee by January 31. Copies also filed with the Social Security Administration (SSA) by January 31. Shows total wages paid and all taxes withheld during the year.
📅 Due to employees and SSA: January 31
944
Employer’s Annual Federal Tax Return
Designed for small employers whose annual employment tax liability is $1,000 or less. The IRS will notify you if you qualify to file Form 944 instead of Form 941. Do not file Form 944 unless the IRS tells you to.
📅 Due: January 31 annually
945
Annual Return of Withheld Federal Income Tax
Used to report federal income tax withheld from non-payroll payments such as pensions, annuities, IRAs, military retirement, and backup withholding.
📅 Due: January 31 annually
The IRS applies automatic penalties when employment taxes are not deposited on time. These are not negotiable and apply per deposit, per period.
| Days Late | Penalty Rate | Example on $10,000 deposit |
|---|---|---|
| 1–5 days late | 2% | $200 |
| 6–15 days late | 5% | $500 |
| More than 15 days late | 10% | $1,000 |
| Still unpaid 10+ days after IRS notice | 15% | $1,500 |
| Failure to file Form 941 (late filing) | 5% per month (max 25%) | Up to $2,500 |
🚩 The Trust Fund Recovery Penalty — This Is Personal Liability
The federal income tax and employee share of Social Security and Medicare taxes that you withhold from employee paychecks are called “trust fund taxes” — because you are holding them in trust for the U.S. Treasury until you deposit them.
If you willfully fail to collect, deposit, or pay over these trust fund taxes, the IRS can hold you personally liable — as the business owner, officer, or any responsible person — for 100% of the unpaid amount. This penalty applies even if your business closes or files for bankruptcy. It is one of the most severe tax penalties in the U.S. tax code.
Source: IRS Publication 15 (Circular E) — Trust Fund Recovery Penalty section.
✅ Payroll Compliance Checklist — Is Your Payroll in Order?
New Hire? These Steps Are Required Before the First Paycheck
Every new employee must complete Form W-4 (Employee’s Withholding Certificate) before their first paycheck is issued. Without it, you are required to withhold federal income tax at the default rate for a single filer with no adjustments. You must also verify employment eligibility using Form I-9 within 3 business days of the first day of work (this is a Department of Homeland Security requirement, not IRS).
💼 Not Sure If Your Payroll Is 100% Compliant?
Payroll tax errors are one of the most common — and most expensive — problems small businesses face. A payroll review with a licensed CPA can catch issues before the IRS does, saving you penalties, interest, and stress.
