Payroll Tax Compliance: What Your Provider Must Handle
Payroll compliance is not optional. This guide covers federal obligations, state-level differences, deposit schedules, and exactly what your payroll software should be automating so you never face a penalty for a missed filing or late deposit.
Legal disclaimer
This guide is for general informational purposes only and does not constitute tax or legal advice. Tax laws change frequently. Consult a CPA or employment attorney for guidance specific to your situation.
Federal Payroll Tax Obligations
Every US employer with W-2 employees must meet these federal obligations. Your payroll software should automate all of these.
Federal income tax withholding
Withhold based on each employee's W-4 elections. Deposit to IRS on a monthly or semi-weekly schedule depending on your lookback period liability.
Social Security tax (employee + employer)
6.2% from employee wages plus 6.2% employer match. Applies up to the Social Security wage base ($168,600 in 2025). Deposit with federal income tax.
Medicare tax
1.45% from employee wages plus 1.45% employer match. No wage cap. An additional 0.9% applies for employees earning over $200,000 in a calendar year.
Federal Unemployment Tax (FUTA)
6% on the first $7,000 of each employee's wages. Usually reduced to 0.6% net after the state unemployment tax credit. File annually, deposit quarterly if needed.
Form 941 quarterly filing
Due April 30, July 31, October 31, and January 31 for the preceding quarter. Reports wages paid and taxes withheld. Late filing penalty is 5% per month.
W-2 distribution and filing
Distribute to employees by January 31. File W-2s and W-3 transmittal with SSA by January 31. Penalties for late filing range from $50 to $580 per form.
1099-NEC for contractors
Required for any contractor paid $600 or more in the year. Distribute to contractor and file with IRS by January 31. Ensure W-9 on file for every contractor before paying.
New hire reporting
Federal law requires reporting new hires to the state child support directory within 20 days. Most payroll software automates this during the employee onboarding flow.
Federal Tax Deposit Schedules
Depositing payroll taxes on time is one of the most common areas where small businesses incur IRS penalties. Your payroll software should handle deposits automatically, but understanding the schedule helps you verify it is working correctly.
| Schedule | When it applies | Deposit deadline | Example |
|---|---|---|---|
| Monthly depositor | Your total tax liability in the lookback period was $50,000 or less | Deposit by the 15th of the following month | January payroll taxes due by February 15 |
| Semi-weekly depositor | Your total tax liability in the lookback period exceeded $50,000 | Wednesday deposits for payroll on Sat-Tue; Friday deposits for Wed-Fri payroll | Payroll processed Wednesday: taxes due next Friday |
| One-day rule | Any payroll where accumulated undeposited liability exceeds $100,000 | Next business day | A large bonus run triggers immediate deposit requirement |
| Quarterly (Form 941) | Businesses with annual liability under $2,500 may pay quarterly with the return | April 30, July 31, October 31, January 31 | Very small businesses with minimal payroll tax liability |
State Payroll Tax Overview
State payroll tax requirements vary enormously. States with no income tax (Texas, Florida, Washington) are far simpler than states with both income tax and local taxes (Pennsylvania, Ohio, New York). Verify your provider supports all states where you have employees.
California
High complexityCalifornia requires additional payroll tax registration with the EDD. State Disability Insurance (SDI) deducted at 0.9% from employee wages. Minimum wage is highest in nation - verify local minimum wages by city.
Texas
Low complexityNo state income tax withholding simplifies payroll significantly. Employers still pay State Unemployment Tax. No additional employer payroll taxes beyond federal and SUI.
New York
High complexityNYC employees face city income tax on top of state. Metropolitan Commuter Transportation Mobility Tax (MCTMT) applies to employers in the 12-county MTA region. Complex multi-jurisdiction payroll.
Florida
Low complexityNo state income tax. One of the simplest states for payroll compliance. Employers pay Reemployment Tax (SUI equivalent) quarterly via the Florida DEO.
Illinois
Medium complexityFlat income tax rate simplifies withholding calculations. Chicago has additional payroll taxes for larger employers. Illinois requires electronic filing for most employers.
Washington
Medium complexityNo state income tax. Washington has a Paid Family and Medical Leave (PFML) program with both employer and employee contributions. Long-Term Care insurance payroll deduction also required since 2022.
Pennsylvania
Very High complexityPennsylvania has hundreds of local earned income tax jurisdictions. Employers must withhold local EIT for employees' municipality of residence and place of work. Use a certified tax officer or payroll software that supports PA local tax.
Ohio
Very High complexityOhio has over 600 local income tax jurisdictions. Municipal withholding is required for both the work location and residence. Ohio has a centralized filing system (RITA and CCA) for many municipalities, but some cities have their own returns.
What your payroll software must automate
- +Federal tax deposits on the correct schedule (monthly or semi-weekly)
- +State income tax withholding for every state where you have employees
- +State unemployment insurance (SUI) calculations and filings
- +Quarterly Form 941 preparation and filing
- +Annual W-2 distribution and SSA filing by January 31
- +1099-NEC filing for contractors paid $600 or more
- +New hire reporting to state agencies within 20 days
- +Local income tax withholding where applicable
IRS penalty reference
Choose a provider that handles compliance automatically
All 8 providers in our comparison include automatic federal and state tax filing. The key differentiators are local tax support, multi-state payroll handling, and whether year-end W-2 filing is included in the base price.
Compare all 8 payroll providers