Handling payroll taxes is one of the most important—and often overlooked—responsibilities for startups. When you’re focused on scaling your business it’s easy to let payroll compliance take a back seat. But trust me, ignoring it is not an option. Payroll taxes are a legal obligation, and mishandling them can lead to serious financial and legal repercussions.
Step One: Classifying Employees vs. Contractors
The first step to getting payroll taxes right is understanding how to properly classify the people who work for you. Are they employees or independent contractors? This distinction impacts everything from tax reporting to payroll responsibilities, and getting it wrong can trigger audits and penalties. This article focuses specifically on payroll tax obligations for workers classified as employees, to help ensure you have a clear understanding of your responsibilities as an employer.
Federal Payroll Taxes: The Non-Negotiables
No matter where your startup is based, federal payroll taxes are mandatory for every employee. Here’s what you need to know:
- Social Security Tax
- 6.2% of each employee’s wages up to an annual limit ($176,100 for 2025).
- Employers must match this amount.
- Medicare Tax
- 1.45% on all wages, with no income cap.
- Employers must match this amount. For employees earning more than $200,000 annually, an additional 0.9% is withheld—but employers don’t match this extra amount.
- Federal Unemployment Tax Act (FUTA)
- 6% on the first $7,000 of each employee’s wages.
- Employers are solely responsible for this tax.
- Most businesses qualify for a 5.4% credit for timely payment of state unemployment taxes, reducing the effective rate to 0.6%.
- Federal Income Tax Withholding:
- This is withheld from employees’ wages based on their W-4 forms.
- Businesses are responsible for withholding and remitting these taxes to the IRS but do not directly pay this tax themselves.
These payroll taxes must be calculated and deposited with the IRS on a regular schedule, which I’ll discuss later in the article.
State Payroll Taxes: What to Expect
When your startup hires employees in a new state, you’re required to register as an employer in that state. This is necessary for compliance with state payroll tax laws and prevents complications down the line. Missing or delaying this step can result in fines, delayed payroll, and unhappy employees.
In addition to federal taxes, your startup might need to pay state-specific payroll taxes for states in which you’re registered as an employer. These vary significantly based on location and can include:
- State Unemployment Tax (SUTA)
- Rates vary from 0% to just over 14% by state and depending on your industry and claims history. See Gusto’s state-by-state SUI tax rates.
- Short-Term Disability and Medical Leave
- Some states, such as California and New York, require contributions to disability insurance and paid family medical leave programs.
- Rates typically range from 0.1% to 1% of wages.
- Workers’ Compensation Insurance
- This isn’t a payroll tax per se, but is often tied to payroll.
- Premiums vary by state and industry.
- State-Specific Mandates
- Certain states mandate additional contributions for retirement plans, paid sick leave, or training programs. For example, Washington requires contributions to its Paid Family and Medical Leave program at a rate of 0.8% of wages (shared by employees and employers).
Tax Deposit Deadlines: Timing Is Everything
The IRS enforces strict deposit deadlines for payroll taxes and meeting them will save you a lot of stress. It’s vital to meet these deadlines to avoid penalties and interest.
Semiweekly Payroll:
- For checks issued Monday or Tuesday: Deposits are due by Friday of the same week.
- For checks issued Wednesday, Thursday, or Friday: Deposits are due by the following Wednesday.
Monthly Payroll:
- Deposits are due on the 15th day of the month following the month in which the employees were paid.
Consequences of Missing Payroll Taxes
Failing to pay payroll taxes or missing deadlines can result in serious consequences for your startup. One of the most immediate repercussions is the accumulation of penalties and interest, which can escalate rapidly. For example, late deposits can incur penalties ranging from 2% to 15%, depending on how long the payment is overdue. Additionally, significant delays or ongoing noncompliance may attract unwanted attention from the IRS, potentially leading to audits, liens, or even personal liability for company officers. These risks highlight the importance of staying on top of payroll tax obligations to protect your business and its leadership.
To avoid these issues, act immediately. File Form 941 via certified mail, enroll in the Electronic Federal Tax Payment System (EFTPS), and start making back payments as soon as possible.
How to Remedy Payroll Tax Issues
If you’ve fallen behind, don’t panic—but don’t ignore the problem either. Here’s what to do:
- File Missing Forms: Submit Form 941 for each quarter you’ve missed.
- Set Up EFTPS: Use this system to make timely deposits moving forward.
- Catch Up on Payments: Work with the IRS to establish a payment plan if necessary.
Payroll Taxes – Don’t Go It Alone
Payroll is complicated, and managing payroll taxes without the necessary experience can lead to costly mistakes. Instead:
- Use a Payroll Platform: Tools like Gusto or Rippling ensure accurate calculations and timely payments.
- Partner with a Payroll Specialist: A startup payroll professional from a firm like Burkland can help you navigate complexities and stay compliant.
- Consider a PEO: Services like JustWorks, TriNet and ADP handle payroll and compliance, but be aware that not all states support PEO registration.
Payroll taxes may seem daunting, but with the right tools and expertise, they’re entirely manageable. By prioritizing compliance and leveraging professional help, you can focus on what matters most—growing your startup. Contact Burkland to request more information.