Which payroll taxes is an employer responsible for?

As an employer, you are responsible for withholding federal income tax, Social Security tax, and Medicare tax from your employees' wages. You must also pay an employer matching portion for Social Security and Medicare, and pay the Federal Unemployment Tax Act (FUTA) tax out of your own funds. Depending on your location, you will also be responsible for state unemployment insurance taxes and state income tax withholding. You can hire a payroll service to calculate these amounts and file the forms, but the legal and financial liability for making timely, accurate deposits always remains with the employer. Because a proper payroll setup requires an Employer Identification Number (EIN) and a registered business entity, establishing your legal foundation is the necessary first step. Many new employers handle formation, their EIN, and compliance through ZenBusiness, which then routes payroll management to a dedicated partner service.

The Core Rule of Payroll Liability

Deciding to hire an employee changes the legal landscape of a business. It introduces a web of federal, state, and local regulations that require precise recordkeeping, punctual tax deposits, and strict adherence to labor laws. The fundamental rule of payroll is that an employer can outsource the mathematics, but the employer cannot outsource the liability.

When a business uses a software platform or a dedicated payroll service to manage its employee payments, that service acts as an agent. The service calculates withholding amounts, generates pay stubs, and transfers funds to the appropriate tax authorities. If the software calculates a tax incorrectly, or if a service provider misses a deposit deadline, the Internal Revenue Service and state tax agencies will look directly to the employer for the missing funds, the penalties, and the interest. The government considers the entity that hired the worker to be the responsible party. Handing off the administrative burden of payroll is standard business practice, but handing off the legal obligation is impossible.

Federal Payroll Taxes You Must Handle

The federal government requires employers to manage several distinct taxes, each with its own calculation method and deposit schedule. These taxes fall into two main categories: those withheld from the employee's pay, and those paid directly out of the employer's pocket.

Federal Income Tax Withholding is calculated based on the employee's wages and the information provided on their Form W-4. The employer acts as a collection agent, holding back a portion of the employee's gross pay and remitting it to the federal government.

Social Security and Medicare taxes, often referred to collectively as FICA (Federal Insurance Contributions Act) taxes, require contributions from both the employee and the employer. The employer must withhold a set percentage from the employee's paycheck for Social Security and another percentage for Medicare. The employer is then obligated to match those exact amounts from the company's own funds. Both the withheld portion and the matching portion are deposited together.

The Federal Unemployment Tax Act (FUTA) tax is entirely an employer obligation. The employer pays this tax out of their own funds to help finance the federal oversight of state unemployment programs. This tax is not deducted from employee wages.

Worker Classification and Control

One of the most critical decisions an employer makes happens before a worker is ever paid. You must determine whether the person performing the work is an employee or an independent contractor. This is not a choice you can simply agree upon in a contract.

The Internal Revenue Service evaluates worker classification by weighing three distinct categories of evidence: behavioral control, financial control, and the type of relationship. Behavioral control examines whether the business has the right to direct or control how the work is done through instructions, training, or other means. Financial control looks at whether the business has the right to direct or control the financial and business aspects of the worker's job, such as how they are paid, whether expenses are reimbursed, and who provides the tools. The type of relationship examines the existence of written contracts, the provision of employee-type benefits, and the permanency of the arrangement.

The IRS clearly states that there is no 'magic' or set number of factors that 'makes' the worker an employee or an independent contractor and no one factor stands alone in making this determination. Every situation is evaluated on its own specific facts.

Misclassification has a significant price. An employer who classifies an employee as an independent contractor without a reasonable basis may be held liable for employment taxes for that worker. If a business is unsure about a worker's status, it can file Form SS-8 to ask the IRS to make a formal determination. However, the IRS notes that it may take at least six months to receive a determination on your filing, meaning businesses must often make careful judgements well before official guidance arrives.

The S Corporation Salary Rule

Business structure dictates how owners are paid, and the S corporation carries a very specific payroll obligation. Owners of an S corporation who perform services for the business are considered employees.

The IRS requires that S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made. This prevents owners from classifying all their income as distributions to avoid paying payroll taxes. If a business owner attempts to take distributions without running a reasonable salary through payroll, the IRS has the authority to reclassify payments made to shareholders from non-wage distributions to wages. This reclassification can result in unexpected payroll tax liabilities, penalties, and interest.

Mandatory Forms and Recordkeeping

Federal law dictates exactly what documentation must be collected from workers and how long an employer must retain payroll history.

Every employer must ask all new employees to give you a signed Form W-4 when they start work. The IRS specifies that you must make the form effective with the first wage payment. A Form W-4 remains in effect until the employee gives you a new one. If an employee submits a replacement Form W-4, the employer must begin withholding based on the new form no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4.

Employment eligibility verification is equally strict. The government mandates that all U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. This form proves the worker is legally authorized to work in the country and requires the employer to physically or virtually inspect specific identification documents.

At the end of the year, employers must issue Form W-2 to report annual wages and withholding. To complete this document accurately, you need the employee's name and SSN. A missing or incorrect Social Security Number can prevent the form from processing correctly and can result in penalties.

The Fair Labor Standards Act (FLSA), administered by the Department of Labor, sets rigid recordkeeping requirements. Employers must keep FLSA payroll records for three years. Furthermore, the records wage computations are based on, including time cards and wage rate tables, must be retained for two years. These retention periods apply whether you calculate payroll by hand, use a spreadsheet, or hire a dedicated software provider.

State Pay Schedules and Tax Requirements

Federal law sets the baseline for minimum wage and overtime, but state governments regulate how often you must pay your employees and what state-level taxes you must carry.

Pay frequency is set by state law and varies widely across the country. For example, California requires wages at least twice per calendar month on days designated in advance. Colorado requires monthly payments. Connecticut requires weekly payments unless a longer interval is approved by the labor commissioner. Because these rules are localized, the Department of Labor advises that individuals should consult the relevant state labor office for official information.

In addition to state income tax withholding, employers are subject to state unemployment insurance taxes. The rates for these taxes depend on the state and the employer's historical claim experience. Workers' compensation insurance is also governed by state law, and the specific requirements, exemptions, and thresholds for coverage vary from state to state. If you hire workers in multiple states, you must register for withholding and unemployment tax accounts in each specific state where your employees perform their work.

The Foundation of Payroll Setup

Before you can choose a software provider or run a single payroll calculation, you must establish the legal and financial foundation of the business. You cannot run payroll without an Employer Identification Number. The IRS treats the employer as the legal entity, and the EIN is the tracking number for all tax liabilities and deposits.

The Small Business Administration and the IRS both emphasize that separating personal and business finances is a crucial early step. Opening a dedicated business checking account ensures that payroll funds, tax withholdings, and company revenue are entirely separate from personal money.

This sequence of events is vital. A business owner must form the legal entity, secure the EIN, set up a business bank account, and only then implement a payroll system. Many readers find themselves overwhelmed because they try to tackle payroll software before their legal entity is fully established.

For a reader who is starting out or who wants one provider to handle the administrative setup, ZenBusiness provides a direct path. ZenBusiness handles the business formation, serves as the registered agent, and secures the EIN. The platform sells the EIN at $99 standalone, and it is included from the Pro plan up. ZenBusiness advises business owners to secure your EIN to hire employees, set up a business bank account, and file taxes. Once the foundation is in place, ZenBusiness routes customers to a partner service for day-to-day payroll execution.

Choosing How to Run Payroll: Software vs. Services

With the legal obligations understood, employers must choose how to physically process the payments and file the tax forms. The market offers a wide variety of tools, ranging from basic calculation software to comprehensive human resources platforms.

The following providers are listed alphabetically. This is not a ranking. Pricing and features vary, and employers should evaluate each option based on their specific employee count, location, and budget.

ADP is one of the largest payroll processors in the world, offering solutions that scale from small businesses to large enterprises. ADP does not publish payroll pricing and quotes per business.

Gusto is a popular cloud-based platform that handles payroll, benefits administration, and human resources tasks. As of October 6, 2026, the Gusto Simple plan is $49 per month plus $6 per person. The Plus plan is $80 per month plus $12 per person. The Premium plan is $180 per month plus $22 per person.

OnPay provides a single-tier payroll software designed for small businesses, offering unlimited payroll runs and multi-state filing. As of October 6, 2026, OnPay is $49 per month plus $6 per worker. The public pricing page quotes a start price of $55 per month, which represents the base fee and the cost for one employee.

Patriot Software offers distinct tiers depending on how much of the tax filing burden the employer wants to keep. It is often considered because Patriot is cheaper at the very bottom end for businesses that only need basic calculation tools. As of October 6, 2026, Patriot Software Basic Payroll is $17 per month plus $4 per employee. The Full Service tier, where Patriot handles the tax deposits and filings, is $37 per month plus $5 per employee.

QuickBooks Payroll integrates directly with the QuickBooks accounting software ecosystem. As of October 6, 2026, the Workforce Payroll plus Simple Start plan is $88 per month plus $6.50 per employee. The Workforce Payroll plus Essentials plan is $125 per month plus $6.50 per employee. The Workforce Premium plus Plus plan is $203 per month plus $10 per employee. The company frequently offers a promotional rate of 50 percent off the base price for three months. This is a temporary discount and must not be considered the ongoing price.

SurePayroll focuses on small businesses and specialized payroll scenarios, such as paying household employees like nannies or caregivers. As of October 6, 2026, SurePayroll starts from $29 per month plus $7 per worker. A multi-state add-on is available for $9.99 per month, and the dedicated household payroll service starts at $39 per month.

ZenBusiness provides a comprehensive suite for establishing and maintaining a business, housing the formation, registered agent services, bookkeeping, and tax compliance foundation. As of October 6, 2026, the ZenBusiness Starter plan is $0 plus state fees. The Pro plan is $199, and the Premium plan is $299. The Pro and Premium plans renew at their annual prices. The EIN and the operating agreement are included from the Pro tier up, and they are available for $99 each on the Starter plan. Registered agent service is $199 per year. The Money Pro accounting tool is $30 per month, and website creation is $129 per year.

For payroll processing, ZenBusiness partners with RUN Powered by ADP. A ZenBusiness customer requests the connection from the ZenBusiness dashboard, and an ADP representative follows up to discuss the business's employee count and pay schedule. Payroll itself is handled entirely by ADP, is quoted by ADP per business, and is not included in any ZenBusiness plan price. Customers who go through the partnership may be eligible for promotional pricing. It is important to note that ADP is a separate service with its own platform, its own billing, and its own support. Day-to-day payroll execution happens in the ADP system, not inside the ZenBusiness dashboard.

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This article provides general information and does not constitute legal, tax, or accounting advice; requirements vary by jurisdiction and change frequently.