Updated: January 28, 2025

Small business payroll taxes: A guide for employers

Published By:

Jon Davis

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Small business payroll taxes come with the territory when running a business and hiring employees. From helping to fund unemployment where you do business to keeping federal programs like Social Security up and running, all payroll taxes serve a larger purpose.

Key takeaways

  • Understand the three types of payroll taxes that small businesses must pay.
  • Learn how to calculate payroll taxes for small businesses.
  • Understand payroll tax responsibilities and payroll reporting essentials.

Any business that pays employees is responsible for payroll taxes. Failing to pay these taxes, whether intentionally or otherwise, may result in fines and attract unwanted attention from the IRS. If you are a new employer trying to understand the basics, or an organization looking for a refresher on responsibilities, we’ve got you covered. In this guide, we break down the payroll taxes for small businesses that you need to pay attention to and how you can make sure you stay compliant.

Types of payroll taxes

There are three types of potential payroll taxes that all small business owners should be aware of:

  1. Federal payroll taxes: The federal payroll tax is 15.3% and covers Social Security and Medicare costs. Employers are responsible for paying half (7.65%) of this tax while employees pay the other half. Employers are also responsible for paying the Federal Unemployment Tax (FUTA), which is equal to 6.0% on the first $7,000 of wages subject to FUTA.
  2. State payroll taxes: State payroll taxes, as the name suggests, vary by state and may include income taxes, unemployment taxes, and other state taxes.
  3. Local payroll taxes: Certain municipalities assess payroll taxes on businesses, although this is not common.

 

We’re touching on several different types of taxes, and you might be wondering which taxes you’re responsible for. Each company is a little different, so we spoke with David Kindness, a certified public accountant (CPA) with over ten years of helping businesses for his two cents on the topic.

 

Let’s start by exploring the income taxes a small business may be required to pay.

“Most businesses are subject to income taxes on the profits they earn,” he explains. “But some – depending on their business structure and taxable income level – may be exempt.


— David Kindness, Certified Public Accountant and OnPay contributor

How much does a small business need to make to pay taxes?

Here’s how David breaks down the obligations.

  • Let’s start with C-corporations. C-corporations are the traditional type of corporation we’re all familiar with. These businesses must pay taxes on all of their taxable income, without exception. The corporate income tax rate is a flat 21% on all taxable income.”
  • Next, let’s discuss unincorporated and pass-through businesses. These companies actually do not pay taxes at the business level. Instead, the owners of these businesses pay taxes on their personal income tax returns. Individual income taxes are ‘graduated’, which means that tax rates increase as incomes increase.
  • As a result, unincorporated or passthrough businesses will owe taxes at the same income levels that an individual would.

 

For tax year 2024, individual income levels and tax rates are listed below for both single filers and married filing joint filers:

 

Income tax rates Single filers Joint filers
10% $11,600 or less $23,200 or less
12% $11,601 to $47,150 $23,201 to $94,300
22% $47,151 to $100,525 $94,301 to $201,050
24% $100,526 to $191,950 $201,051 to $383,900
32% $191,951 to $243,725 $191,951 to $243,725
35% $243,726 to $609,350 $487,451 to $731,200
37% $609,351 or more $731,201 or more

 

Note: it’s important to remember that business owners generally only owe taxes if their income is greater than the standard deduction, which is $14,600 for individuals and $29,200 for married filing joint taxpayers for tax year 2024.

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Knowing what small business payroll taxes you have to pay, and when you need to pay them, helps you stay compliant with state and local regulations and avoid fees and penalties. Remember that you are responsible for filing these taxes with the IRS on a pre-elected payment schedule that you must choose before the start of each calendar year.

 

If you’re reading through each of these obligations and are a “do-it-your-selfer,” check out our resource on how to do payroll manually for more guidance. But we also wanted to provide you with an outside perspective, so again we spoke with David Kindness, a CPA and one of OnPay’s subject matter experts.

 

He says doing your own payroll is possible, but to keep a few things in mind.

Can a small business do their own payroll?

“The short answer is yes, it’s possible to manage your own payroll. Doing so offers potential cost savings and greater control over employee data. Running payroll yourself involves collecting and storing employee and contractor data, tracking hours and leave, calculating payroll and taxes, and more. These tasks are doable with some education, effort, and time investment.”


— David Kindness, Certified Public Accountant and OnPay contributor

“But make no mistake – running your own payroll can come with significant challenges,” he says. “You’ll need to develop an understanding of complex technical concepts, adhere to strict regulations, maintain accurate records at all times, calculate & produce detailed payroll reports, and of course, pay taxes to good old Uncle Sam.”

 

Outsourcing your payroll, on the other hand, offloads these time-consuming tasks to an external accounting or payroll provider. With this option, the external payroll provider manages everything payroll-related for you. All you have to do is send them your information and you’re good to go. This frees up a lot of your time and energy, but this option is generally quite expensive.

“Luckily, another option exists that allows businesses to run their own payroll without the headaches or the significant cost of outsourcing: utilizing payroll software such as OnPay, because it allows businesses to easily track payroll data, make accurate calculations, pay employees, submit taxes to the government, and stay compliant with ever-changing regulations, all at the click of a button or two.”


— David Kindness, Certified Public Accountant and OnPay contributor

Calculating payroll taxes

Understanding how to estimate payroll taxes for a small business ensures you don’t overpay or underpay these vital taxes. Fortunately, calculating payroll taxes is a fairly straightforward process.

 

Employee tax withholdings

Employees pay payroll taxes just as small businesses do, and most opt to have these taxes withheld from their paychecks in order to be filed by the business or a payroll provider. The taxes you need to withhold will depend on your location, but will always include the Federal Insurance Contributions Act (FICA) payroll tax, which covers Social Security and Medicare contributions. The FICA tax rate is 15.3%, with both the employer and the employee paying half (7.65%) of the total. Employers are also subject to the FUTA tax, but employees do not have to pay this tax.

 

Other employee tax withholdings may vary based on salary vs. hourly pay, overtime pay, bonus compensation, tipped wages, and a number of other factors. You can use OnPay’s payroll tax calculator tools to figure out tax withholdings for your employees in your state.

 

Accounting for the difference between employer payroll taxes and employee taxes can be complex, especially in larger organizations, so it’s important to regularly assess employee withholdings to make sure they’re accurate.

 

Deductions and contributions

Employee paychecks may include retirement fund contributions, charitable contributions, health insurance payments, and a variety of other deductions and contributions. Some of these, such as 401(k) contributions, are pre-tax deductions, meaning they’re deducted before taxes are assessed on the reduced gross paycheck amount.

 

This is where payroll management can get complicated. Different employees may opt for different deductions. That said, doing payroll by yourself from start to finish is much easier with OnPay’s comprehensive payroll tools to help you meet all your responsibilities as an employer.

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Employer responsibilities

Tax filings are one of a small business’s most important responsibilities. Just as an individual falling behind on income taxes can lead to IRS audits, a business failing to properly file taxes can lead to audits or significant penalties, especially if you’ve been reporting incorrectly for an extended period of time.

 

Reporting obligations

Generally speaking, employers must report wages, tips, and other compensation to the IRS by filing the required form or forms. Similarly, any tax payments you make must be reported by filing the applicable tax form, such as Form 941, 943, 944, 945, or 940, either on paper or through e-file. Many payroll providers, like OnPay, offer tax reporting services to calculate payroll taxes and file them for you.

 

Once more we caught up with David about a burning question most business owners need to get up to speed on when opening their doors.

How does a small business pay payroll taxes?

“Businesses pay payroll taxes by withholding a portion of their employee’s wages and contributing a portion themselves. These taxes include federal, state, and local income taxes, as well as payroll taxes such as FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax Act), and SUTA tax (State Unemployment Tax Act), if applicable.”


— David Kindness, Certified Public Accountant and OnPay contributor

How often do they need to be paid?

“Businesses, much like individuals, must pay these taxes periodically as part of their regular estimated tax payments. Most employers must deposit federal income taxes (FIT) and FICA taxes either monthly or semi-weekly, depending on their tax liability. Some small employers with low tax liabilities may be able to deposit these taxes quarterly.

 

FUTA and SUTA taxes, on the other hand, must generally be paid quarterly. Some states may require that SUTA taxes be paid more frequently. Similarly, state and local jurisdictions determine when state and local income taxes must be paid by businesses.”

 

Regardless of their deposit schedule, businesses must file a payroll tax return each quarter. This could Form 941, 943, 944, or 945, depending on your business type. Similarly, businesses must file an annual payroll tax return, such as Form 940, Employer’s Annual Federal Unemployment (FUTA).

 

To pay any required payroll taxes, simply deposit the appropriate amount using either a paper check or the Electronic Federal Tax Payment System (EFTPS). For paper filers, the tax forms generally come with a detachable tax payment voucher. For example, Form 941 includes a Form 941-V Payment Voucher, which businesses can remove, fill out, and send to the IRS with a check attached.

 

Payment schedules

It’s important to remember that before the beginning of each calendar year, employees must determine which payment schedule they will use to deposit payroll taxes with the IRS. You may choose either monthly or semi-weekly. Again, a payroll provider like OnPay can handle this process for you, or you can do it yourself using Publication 15 for Forms 941, 944, and 945, or Publication 51 for Form 943.

Importance of maintaining accurate payroll records

As a small business owner, you’re responsible for running payroll on time and maintaining accurate payroll records. This is crucially important for several reasons:

  • Better employee records: Employees often need to reference pay stubs for their own tax filings or when applying for housing or loans. Inaccurate payroll records can cause significant problems for your employees.
  • Tax compliance: Accurate record-keeping will help you avoid fees and penalties as well as costly IRS audits.
  • Avoiding overpaying: Poor payroll record-keeping can lead to accidental overpayments, which may not always be refunded to you. (Instead, they may be treated as a tax credit.) This can hurt your business’s cash flow and cause unnecessary liquidity problems.

 

Simply put, you must maintain accurate small business payroll records. Failure to do so can have serious consequences for your business.

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Avoid payroll tax penalties with some preparation

Payroll tax penalties can have a major impact on small businesses, especially when money is tight. Small business payroll taxes are even more complicated than your personal taxes, which is one reason why many businesses tend to seek outside help or use a tool to keep track of it all.

 

If you’re ready to keep payroll stress to a minimum and your business compliant, companies like OnPay can handle payroll tax calculations, payment processing, reporting, and tax filing for a price that fits your business’s budget. As you grow your business, our team is here to help and ready to answer your questions!

 

This article is provided for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.

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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.