Payroll taxes: what's withheld, what you owe, and when

Hiring your first employee feels like a milestone, right up until the first payroll run lands and you realize the money leaving your bank account doesn't match the salary you agreed to. The number is bigger. Sometimes a lot bigger. Payroll taxes are the reason, and most founders only understand them after a confusing IRS notice or a cash crunch. The good news: the system is logical once you separate it into three clean buckets.

Those three buckets are what gets withheld from your employee's pay, what you owe on top as the employer, and when all of it has to be sent to the government. Mix them up and you'll either overpay, underpay, or get hit with penalties for being late. Keep them straight and payroll becomes a predictable line item you can plan around.

Let's walk through each one with real numbers, using a hypothetical employee earning a $60,000 annual salary, or $5,000 a month.

What gets withheld from the paycheck

Withholding means money you take out of the employee's gross pay and hold on their behalf to send to the government. It is their money, not yours — you are just the middleman. Four things typically come out of every check.

• Federal income tax — based on what the employee put on their Form W-4, the worksheet they fill out when hired.
• State income tax — in the 40-plus states that charge it; a handful, like Texas and Florida, do not.
• The employee's share of Social Security — 6.2% of wages, up to an annual wage cap that the IRS adjusts each year.
• The employee's share of Medicare — 1.45% of wages, with no cap.

Social Security and Medicare together are called FICA, short for the Federal Insurance Contributions Act. The employee's FICA share is 7.65% (6.2% plus 1.45%). On a $5,000 monthly check, that's about $382 in FICA alone, before any income tax. The employee's take-home pay is what's left after all four withholdings.

What you owe on top as the employer

Here's the part that surprises people: withholding doesn't cost you anything extra, because it comes out of the employee's pay. But you, the employer, owe your own taxes on top of the salary — and these are real costs that hit your bank account.

First, you match the employee's FICA. That's another 7.65% the company pays out of its own pocket — roughly $382 a month on our $5,000 employee, or about $4,590 a year. Then come unemployment taxes: FUTA (federal unemployment) and SUTA (state unemployment). FUTA is a small federal levy on the first slice of each employee's wages, and SUTA is the state version, where your rate depends on your state and your history of layoffs. Together they usually add a few hundred dollars per employee per year.

The loaded cost of an employee

Add it up and the lesson is simple: an employee costs noticeably more than their salary. A useful rule of thumb is a loaded cost of roughly 1.1 to 1.3 times base pay — meaning a $60,000 salary really costs you somewhere between $66,000 and $78,000 once you include employer taxes, and more still if you offer benefits like health insurance or a 401(k) match.

This matters the moment you build a budget or price your services. If you quote a project assuming an employee costs exactly their salary, you've already underpriced it. Use the loaded number when you model headcount, and the next hire won't blow a hole in your runway.

When you have to remit, and the one rule you can't break

Collecting and owing the tax is only half the job — you also have to send it in on a strict schedule. You make payroll tax deposits (the withheld amounts plus your employer share) on a monthly or semiweekly cadence that the IRS assigns based on your size. Each quarter you file Form 941, which reconciles what you withheld and owed against what you deposited. And every January you issue a Form W-2 to each employee summarizing their full year of wages and withholding.

Now the rule that gets founders into serious trouble: never treat withheld taxes as cash flow. That FICA and income tax you held back belongs to your employees and the government — it was never your money to spend. Dipping into it to cover a slow month is one of the few mistakes that can make the IRS pursue you personally, piercing the protection your company normally gives you. Limits and exact thresholds shift year to year, so confirm current figures with your payroll provider or tax advisor.

The practical move is to stop doing this by hand. A payroll provider calculates withholding, files your 941s, issues W-2s, and makes deposits on time automatically — for a modest monthly fee that's far cheaper than a single penalty. Set that up before your first hire, and payroll taxes become something you barely think about.