Hiring your first employee is a significant milestone — and it comes with a new set of tax obligations that many business owners are not fully prepared for. Payroll taxes are not optional, and the penalties for getting them wrong are real.

This article covers the core payroll tax obligations for small businesses: what you withhold from employees, what you pay as the employer, how and when to deposit those taxes, and what forms you file.

What Gets Withheld From Employee Wages

When you pay an employee, you are required to withhold three types of federal taxes from their paycheck:

• Federal income tax: Based on the employee's W-4 and the IRS withholding tables. The amount varies by income level and filing status.
• Social Security tax: 6.2% of wages up to the annual wage base ($176,100 for 2025). The employee pays 6.2%; you match it as the employer.
• Medicare tax: 1.45% of all wages, no wage base limit. The employee pays 1.45%; you match it. An additional 0.9% applies to wages over $200,000 — this is withheld from the employee only, not matched by the employer.

In addition to federal withholding, you must withhold New York State income tax and, if applicable, New York City income tax from employees who live or work in those jurisdictions.

The Employer's Share

As the employer, you pay your own share of Social Security (6.2%) and Medicare (1.45%) taxes on top of what you withhold from employees. This is the employer's portion of FICA taxes — it is not withheld from the employee; it is an additional cost to the business.

You are also responsible for Federal Unemployment Tax (FUTA) — 6% on the first $7,000 of each employee's wages, reduced by a credit for state unemployment taxes paid (typically bringing the effective rate to 0.6%). New York State has its own unemployment insurance (SUI) tax with rates that vary based on your experience rating.

Deposit Schedules: When Taxes Must Be Paid

This is where many small business owners get into trouble. Payroll taxes are not paid annually — they must be deposited on a schedule determined by the IRS based on your total tax liability.

• Monthly depositors: If your total payroll tax liability in the lookback period was $50,000 or less, you deposit by the 15th of the following month.
• Semi-weekly depositors: If your liability exceeded $50,000 in the lookback period, you deposit within 3 business days of payday (Wednesday/Thursday paydays deposit by the following Wednesday; Friday/Saturday/Sunday/Monday paydays deposit by the following Friday).
• Next-day rule: If you accumulate $100,000 or more in payroll tax liability on any day, you must deposit the next business day regardless of your normal schedule.

New businesses start as monthly depositors. Your deposit schedule is re-evaluated each year based on the prior lookback period.

Quarterly and Annual Filings

In addition to making deposits, you must file reports:

• Form 941 (Employer's Quarterly Federal Tax Return): Filed quarterly, reporting wages paid, taxes withheld, and deposits made. Due April 30, July 31, October 31, and January 31.
• Form 940 (FUTA): Filed annually, reporting federal unemployment tax. Due January 31 of the following year.
• Form W-2: Issued to each employee by January 31, reporting annual wages and withholding. Copies filed with the Social Security Administration.
• NYS-45: New York State quarterly combined withholding, wage reporting, and unemployment insurance return.

The Trust Fund Penalty

Payroll taxes withheld from employees are held in trust for the government. If a business fails to deposit those taxes, the IRS can assess the Trust Fund Recovery Penalty — equal to 100% of the unpaid trust fund taxes — against any person responsible for collecting and paying over those taxes. This includes business owners, officers, and sometimes bookkeepers or accountants with authority over payroll.

The trust fund penalty is one of the most serious tax penalties a business owner can face. It is assessed personally, not just against the business, and it survives bankruptcy. This is why payroll tax compliance is treated as a priority obligation.

Using a Payroll Service

Most small businesses use a payroll service (Gusto, ADP, Paychex, QuickBooks Payroll) to handle withholding calculations, deposits, and filings. These services reduce the risk of deposit errors and missed deadlines. Even with a payroll service, the business owner remains responsible for ensuring taxes are actually deposited — the service is an agent, not a guarantor.

If you use a payroll service, verify periodically that deposits are being made and that your 941s are being filed. Do not assume everything is handled without checking.