Staying compliant with payroll tax laws is critical for small businesses. Mistakes can lead to fines, strained employee relationships, and even legal trouble. Here are six payroll tax compliance tips to help you stay on track:
1. Keep Organized Records
Accurate recordkeeping is the foundation of payroll tax compliance. Track hours worked, wages paid, and all taxes withheld. Maintaining organized, up-to-date records makes it easier to verify that you’re withholding and paying the correct amounts. If you ever face an IRS or state tax audit, clear and detailed documentation can save you time, money, and stress.
2. Understand Federal Withholding Requirements
Payroll taxes include several components you need to understand:
- Federal Income Tax: Employees complete Form W-4 so you can determine how much federal income tax to withhold from their paychecks. Use IRS tax tables to calculate the correct amounts.
- FICA Taxes (Social Security and Medicare): You must withhold a set percentage from employee wages for Social Security and Medicare—and match that amount as an employer.
- Social Security: 6.2% from the employee and 6.2% from the employer (12.4% total). For 2025, wages up to $176,100 are subject to Social Security tax.
- Medicare: 1.45% from the employee and 1.45% from the employer (2.9% total). Unlike Social Security, there’s no wage limit for Medicare tax; all wages are subject.
3. Don’t Overlook Employer Contributions
Beyond employee withholdings, employers are responsible for additional payroll taxes:
- Federal Unemployment Tax Act (FUTA) Tax: Employers pay FUTA tax to support unemployment benefits. Employees do not contribute.
- State Unemployment Insurance: Each state has its own rules and rates. Check with your state’s labor department or the U.S. Department of Labor for details.
4. Follow Filing and Deposit Deadlines
Missing deadlines can be costly. Here’s what to keep in mind:
- Deposit Schedules: Depending on the total amount of taxes withheld, you’ll need to deposit federal taxes either monthly or semi-weekly. Missing a deposit deadline can result in penalties and interest.
- Quarterly and Annual Filings: Submit required forms, like Form 941 (quarterly) for employment taxes and Form 940 (annually) for FUTA tax, on time.
Be aware of the Trust Fund Recovery Penalty: If a “responsible person” (such as an owner, officer, partner, or employee with financial authority) willfully fails to deposit employment taxes, they can be held personally liable for the full amount of unpaid taxes plus interest.
5. Stay Updated on Regulatory Changes
Tax regulations change frequently. The IRS and state agencies often update payroll tax requirements, and new laws can add new obligations. Staying proactive helps you adjust payroll systems and procedures ahead of time, rather than scrambling to comply at the last minute.
6. Get Professional Help
Payroll taxes can be complicated, even for diligent business owners. Professional advisors can:
- Help you choose the right payroll system
- Calculate employee tax withholdings accurately
- Navigate multi-state filing requirements
- Stay ahead of regulatory changes
Contact us when you need help setting up and maintaining a compliant, efficient payroll process.
