Small Business Payroll Taxes & Overdue Payment Penalties  


Small business owners are required to withhold a certain amount of money from their employees’ paycheck and submit it to the IRS as Payroll taxes. Filing tax forms and making payroll deposits can be intimidating to small business owners because of the processes involved. Making payroll taxes deposits to the IRS requires withholding, reporting, and paying the taxes within the stipulated period. It can be difficult to understand the types of payroll taxes a small business is supposed to pay, as well as knowing and remembering the payment deadlines.


Need a payroll service that automatically calculates tax deductions and files them before payment deadlines? Compare these top payroll service providers to see which full-service online payroll provider is best suits your company needs!

The Payroll Taxes Paid By Small Business Owners


Payroll taxes are used to fund essential welfare programs such as Medicare, unemployment insurance, as well as social security. Payroll taxes are divided into three categories: federal, state, and local payroll taxes. This because of the nature of the country’s administration.


The Federal Payroll Taxes


There are three main types of federal payroll taxes:

  1. Federal Insurance Contribution Act (Medicare and Social Security Tax)

Both employees and their employers are required to pay the FICA taxes to fund their Medicare and social security programs. Small business owners are required to withhold FICA tax from their employees’ paycheck and report the withheld amounts to the IRS. The employers are also required to withhold their FICA tax as well.

  1. Federal Income tax

The small business owners are supposed to withhold money from their employees’ paychecks as income tax and report it to the IRS. These taxes are arrived at based on an employee’s earnings and are usually directed towards funding national security and the defense of our country.

  1. Federal Unemployment Tax Act

These are taxes that fund unemployment compensation benefits whenever you lose your job. Small Business Owners are required by law to withhold all the FUTA taxes from their employees’ paychecks. Their employees will be covered when they lose their jobs.


State and Local Payroll Taxes


Both the local and state governments have payroll taxes just like the federal government. Some of the state payroll taxes include state unemployment taxes and income taxes. The local payroll taxes may vary from county to county including school board tax or a flat income tax.

Here are the main types of state and local payroll taxes.

  1. State Income Tax Withholding

Most States in the US have State Income Tax except for Texas, Wyoming, Washington, South Dakota, Nevada, Florida, and Alaska. Moreover, in Tennessee and New Hampshire, only dividends and interests are taxed. In the remaining States, small business owners are mandated to withhold income tax from their employees’ paycheck.

  1. State Unemployment Tax

This payroll tax cuts across all States in the US. Employers are supposed to withhold the State Unemployment Tax from their employees’ wages together with The Federal Unemployment Tax. If the employer consistently pays the SUTA taxes, then he or she can claim a credit that waives their FUTA taxes.

  1. Other State and Local Payroll Taxes

Some payroll taxes differ by location. These payroll taxes may include family leave payments, school board tax, among many others.



Have questions about payroll laws and want online payroll in your state(s)? Check out Gusto here, and get a free 30 day trial, no credit card required.

Payroll Tax Expense Examples


The Federal and State taxes that you withhold from your employees’ paychecks are not expenses at all. This is because you remit them to the responsible administrative agencies. Payroll tax expenses are the ones you must pay as a small business owner for having employees. These expenses occur at both the Federal and State level. They include:

  1. The Financial Insurance Contribution Act Taxes (FICA)

FICA taxes include Medicare and Social Security taxes. The taxes collected are mandated to fund these programs.

  • Social Security Tax

As of 2019, you pay a social security tax of 6.2 percent for all the wages given to your employees up to 132, 900 Dollars per employee for the year.

  • Medicare Tax

For the Medicare tax, you pay 1.45 percent for all the wages paid to your employees.

  1. Federal Unemployment Tax

Employers are mandated to pay the FUTA tax on a specific percentage of wages paid to their employees. As of 2019, the employers are supposed to pay 6 percent of the first 7000 Dollars paid to an employee. You can apply for a credit on this tax if you are consistent in filing the State Unemployment Tax.

  1. State Unemployment Tax

This is another payroll tax expense incurred by employers, and it is administered by the State Unemployment Insurance Agency. The State Unemployment tax rates vary from State to State, and your rates may also depend on whether you are a new employer, the number of employees that have drawn unemployment benefits on your account or even whether you are in the construction or non-construction business. For example, in Arizona, a new employer would be charged 2 percent for the first 7000 Dollars paid to an employee while in Ohio, a new employer would be charged 2.7 percent for the first 7000 Dollars given to an employee.

  1. Employment Training Tax

As of 2019, Arizona and California business owners pay 0.1 percent of the first 7000 Dollars paid to their employees as employment training Tax. This tax expense may not be present in all States within the country.

You need to record all the payroll tax expenses you have incurred as a business owner for each pay period in the company’s payroll journal.


Penalties for not Paying the Various Payroll Taxes


One of the responsibilities of an employer is to collect, report, and remit the payroll taxes as required by the Federal and State laws of the United States. You may be liable for the payroll taxes not remitted to the IRS if you fail to do your job well as an employer.

It is the responsibility of the employer to see that tax returns are filed within the stipulated time and that taxes are paid correctly during each financial year.

Here are some of the penalties for not paying the payroll taxes as required by Federal and State Laws:

  1. Federal Insurance Contribution Act (Medicare and Social Security Tax)

The penalty for not withholding or depositing FICA taxes to the US Treasury is known as Trust Fund Recovery Penalty. The Trust Fund Recovery penalty is 100 percent of the unpaid trust fund tax. If this penalty cannot be collected immediately by the employer, then the IRS will impose the amount on all the persons deemed responsible for collecting the taxes within the institution.

  1. Federal Income Tax Withholding

Trust Fund Recovery Penalty also applies to the Federal Income Tax Withholding. If you fail to deposit the Income taxes for a particular pay period with the US Treasury, then your business will have to meet the conditions of the Trust Fund Recovery Penalty.

Apart from the penalties, you should remember that interests accrue from the day you were supposed to pay the payroll taxes. You need to be cautious when handling these taxes to avoid getting penalized.

Penalties subject to payroll preparation mistakes

  • Failing to prepare the W-2 forms for your employees and deliver them before the deadline attracts a 50-Dollar penalty for each statement that was sent late or was prepared incorrectly.
  • You can also be penalized by the IRS for misclassifying your employees as independent contractors instead of your workers. The IRS assumes that you intended to evade the payroll taxes for these employees named as independent workers.
  • Sometimes you can be lucky to prove that your failure to remit the payroll taxes to the US Treasury was not willful and therefore avoid the Trust Fund Recovery Penalty. But you will never escape the penalty for late payments.

Automate tax deadlines to make your payroll simple. Compare these top US payroll providers to choose which online payroll provider best-fits your company’s payroll needs.


Knowing the payroll taxes that you deposit with the US Treasury every financial year is beneficial to you as an employer even if you have an employee or payroll provider responsible for this tedious job. Payroll providers can help you understand payroll taxes, what is funded by your taxes both in the state and federal governments, and how they are collected from your employees’ paycheck. Withholding and remitting payroll taxes is no longer intimidating because you can outsource your payroll needs to reliable and experienced online payroll providers.