The gist: when you hire W-2 employees, you become responsible for withholding certain taxes from their pay, paying employer taxes of your own, depositing those amounts with the government on a schedule, and filing the right forms each quarter and year. Here's the whole picture in plain English.
1. Withholding from the employee
From each paycheck you withhold:
- Federal income tax — based on the employee's Form W-4.
- Social Security (part of FICA) — 6.2% of wages, up to an annual wage base the IRS adjusts each year.
- Medicare (part of FICA) — 1.45% of wages, plus an additional 0.9% on higher earners.
- State (and sometimes local) income tax — where applicable, based on state withholding forms.
2. Employer taxes you pay yourself
On top of what you withhold, you owe:
- Matching FICA — you match the employee's 6.2% Social Security and 1.45% Medicare.
- FUTA (federal unemployment) — a standard 6.0% on the first $7,000 of each employee's wages, commonly reduced to as low as 0.6% after a state credit.
- SUTA (state unemployment) — rate and wage base vary by state and your experience rating.
3. Depositing on time
The taxes you withhold and owe don't sit in your account — they must be deposited with the IRS (and your state) on a monthly or semiweekly schedule that depends on your payroll size. Late deposits are one of the most common — and avoidable — sources of penalties for small employers.
4. Filing the forms
- Form 941 — filed quarterly, reporting wages, withheld income tax and both shares of FICA.
- Form 940 — filed annually for FUTA.
- W-2 & W-3 — issued to employees and the SSA after year-end, summarizing each employee's wages and withholding.
- 1099-NEC — issued to independent contractors you paid during the year (no payroll-tax withholding for them).
Why small businesses outsource this
None of this is impossible — but the deposit schedules, multi-state rules and year-end forms add up, and mistakes carry penalties. That's why many owners hand payroll to a service: the pay runs, deposits, filings and W-2s are handled for you, and you just approve each run.
This guide is general information, not tax advice. Payroll-tax rates, wage bases, thresholds and due dates change over time and vary by state — the figures above (such as the 6.2%, 1.45% and 6.0%/0.6% rates and the $7,000 FUTA wage base) reflect long-standing federal figures but should be confirmed for the current year. Consult a licensed CPA or the IRS for your situation. She Assist USA provides payroll processing and coordination and is not a CPA firm.
Frequently asked questions
What is FICA?
FICA is the combination of Social Security and Medicare taxes. Social Security is withheld at 6.2% from the employee and matched 6.2% by the employer, up to an annual wage base the IRS adjusts each year. Medicare is 1.45% from the employee and 1.45% from the employer, with an additional 0.9% Medicare tax withheld from higher-earning employees. Confirm current rates and the wage base for the year.
What are FUTA and SUTA?
FUTA is the federal unemployment tax, paid by the employer; the standard rate is 6.0% on the first $7,000 of each employee's wages, often reduced to as low as 0.6% after a state credit. SUTA is state unemployment tax, with rates and wage bases that vary by state and by your experience rating.
What is Form 941?
Form 941 is the Employer's Quarterly Federal Tax Return. Employers use it to report wages paid, federal income tax withheld, and both the employee and employer shares of Social Security and Medicare for the quarter.
What is Form 940?
Form 940 is the employer's annual FUTA (federal unemployment) tax return, filed once a year to report and reconcile federal unemployment tax.
Do I withhold payroll taxes for 1099 contractors?
No. You generally do not withhold payroll taxes for independent contractors. You pay them their full invoice and report annual payments on Form 1099-NEC. Just be careful about worker classification — treating a true employee as a contractor can create penalties.