How To Calculate, Pay, and Report Payroll Taxes

A woman works on her taxes at a desk.

Korrawin Khanta / EyeEm / Getty Images

Payroll taxes are taxes withheld from an employee's paycheck and then reported on and remitted to the IRS. These taxes include federal income tax, Social Security and Medicare, unemployment, and state and local income taxes.

You are required as an employer to report on and deposit payroll taxes to the IRS and state tax authorities on your employees' behalf. Employers also pay their share of payroll taxes to the IRS or state tax authorities.

This article will help you understand the process of calculating, withholding, paying, and filing payroll taxes. Learn about payroll tax deposits and how much it can cost you to file payroll tax returns.

Key Takeaways

  • Payroll taxes are a group of taxes that employers withhold from their employee's wages and remit to the IRS on behalf of their employees. 
  • There are several categories of payroll taxes: federal income tax withholding, Social Security and Medicare (FICA), unemployment, workers’ compensation, and state or local taxes.
  • As an employer, you must calculate, pay, and report payroll taxes for yourself and your employees following a strict IRS tax schedule.

What Are Payroll Taxes?

Payroll taxes are the taxes you withhold from employees’ paychecks for income tax and FICA taxes (Social Security and Medicare). You must collect these taxes, pay them to the IRS, report on what was paid, and file payroll tax reports. You must also make payments for unemployment taxes and worker's compensation coverage

“Payroll taxes” refers to several different federal, state, or local taxes: 

  • Amounts withheld from employees pay for income taxes owed by the employees
  • Amounts withheld from employee pay for social security and Medicare, which are
  • Matched by amounts employers must contribute for social security and Medicare taxes (called FICA tax)
  • Additional taxes paid by employers (not employees) for unemployment taxes and worker's compensation

Payroll taxes are called "trust fund taxes" because they are held in trust for the owner (the IRS, Social Security Administration, and your state).


The distinction between payroll taxes and employment taxes can be confusing. Most people use the term "payroll taxes" to mean taxes associated with payroll. The IRS calls them employment taxes.

How to Prepare for Payroll Taxes

When it comes to payroll taxes, employers are responsible for: 

  • Collecting information from appropriate payroll tax documents from employees
  • Withholding the amount indicated by the employee from their pay
  • Correctly calculating payroll taxes and other employment taxes
  • Setting aside amounts you must pay as an employer into separate accounts payable in your accounting system
  • Paying payroll taxes to the IRS, states, and other taxing authorities
  • Filing payroll tax reports in a timely manner

Federal Registrations

Before you hire your first employee, there are some tasks you must undertake and some registrations you will need to have.

You will need an Employer ID Number (EIN), which means registering with the IRS. It's easy to apply online and receive the number immediately. 

You must also register with the IRS for payroll tax payments and reports. That registration involves signing up for the Electronic Federal Tax Payment System (EFTPS). The IRS doesn't accept paper checks, so this is the only way to pay your payroll taxes. 

State Registrations

You must register with your state for income taxes, so you can collect, report and pay state-level income taxes from employee pay. In addition, you'll need to register as an employer with your state's employment bureau so you can pay unemployment and worker's compensation taxes. 

Finally, you must give information about all new employees to your state's new hire reporting website. The states use this information to track employees to be able to garnish wages for child support. 


You will need to register with your state and receive an Employer Identification Number (EIN) before you can begin hiring new employees.

How Do I Calculate Payroll Taxes Deductions?

The employer calculates withholding and deductions from employee paychecks. You are responsible for withholding the appropriate amount of taxes from an employee's paycheck. You must ensure that you are paying the government the appropriate federal income tax, FICA (Social Security and Medicare) taxes, and state income taxes. 

The payroll tax process begins with paying employees. When you pay employees, you must withhold payroll taxes and other employment taxes from their pay. For each payroll, you must keep track of the payroll taxes you deducted and set aside money to pay your portion of those taxes as an employer. As required by federal and state agencies, you must report the taxes owed. Finally, you must make periodic payments of these taxes.

Payroll Tax Deposits

Payroll taxes are paid to the IRS, which then reports earnings and FICA contributions to the Social Security Administration (SSA). Employers must make these payroll tax deposits electronically through the EFTPS system. 

Payroll taxes are paid to the IRS either semi-weekly or monthly, based on the total amount of payroll taxes you owe. If you have only a few employees and a small payroll tax liability, you pay monthly; if you have many employees and a more significant payroll tax liability, you pay semi-weekly.


Use a yearly payroll tax calendar to see when to send reports and make payments. Keep in mind that this calendar doesn't include state payroll taxes. You will need to visit your state website to learn more about those.

Payroll Tax Returns

You must file a quarterly report with the IRS using Form 941, an Employer's Quarterly Federal Tax Return. This return shows:

  • The amount you have collected for income tax withholding from employees
  • The amount you have collected for FICA (Social Security and Medicare) from employees
  • The total amount owed for FICA (including the employer portion of this tax)

You must also include the amounts you have deposited (monthly or semi-weekly) for these payroll taxes. If your deposits are less than the amount owed, you must pay the IRS. Form 941 is complex; take some time to read more details in this article.

Setting Up a Payroll System

You'll need to take all this information and set up a system to do your payroll, beginning with new hire forms, including paying employees, submitting reports, and making payments to federal and state agencies.  

Most business owners use a payroll software program or outsource to a payroll service to simplify this process. However, as an owner, it is helpful to understand the process, including the steps involved and the calculations used.

You can utilize an accounting software program to stay organized with tax and payroll requirements, or you can do your own payroll and payroll taxes. If managing payroll is too overwhelming, consider hiring a payroll processing service to take over these tasks.

Frequently Asked Questions (FAQs)

When are payroll tax returns due?

Payroll tax returns are due on the last day of the month following the end of a quarter. In a given calendar year, payroll tax returns are due on April 30, July 31, October 31, and January 31.

The IRS requires employers to deposit payroll taxes by the 15th day of each month or by the next business day if that date falls on a weekend or holiday.

How much should I pay for payroll tax returns filing?

There are two options for e-filing payroll taxes: using an IRS-approved Modernized e-File (MeF) Provider or paying an IRS-authorized tax professional. For the first option, you will need to purchase a monthly subscription and may pay additional fees to file returns. You will need to hire a tax professional's services for the second option. Payroll providers can charge monthly, hourly, or consult for their services, with cost increases based on the number of employees.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Topic No. 751 Social Security and Medicare Withholding Rates."
  2. U.S. Department of Labor. “State Labor Offices.”

  3. U.S. Department of Health and Human Services. “State New Hire Reporting Websites.”

  4. IRS. “Topic No. 755 Employer Identification Number (EIN) – How to Apply.”

  5.  Social Security Administration. “Social Security Administration's Master Earnings File: Background Information.”

  6.  IRS. “About Form 941.”

  7.  IRS. "Topic No. 758 Form 941 – Employer's Quarterly Federal Tax Return and Form 944 – Employer's Annual Federal Tax Return."

  8. IRS. “Topic No. 757 Forms 941 and 944 – Deposit Requirements.”

Related Articles