Payroll Taxes for Small Business: What You Owe and When

An auto repair shop owner in Pasadena had been in business for nine years and had never had a tax problem. Last year, he grew from two employees to seven. His bookkeeper quit in October. He decided to process the last two payrolls himself using the same manual process his bookkeeper had used.

What he did not know was that the bookkeeper had been manually scheduling EFTPS deposits each pay cycle. When he processed the payrolls, the money left his account and went to employees. The payroll taxes sat in his checking account for six weeks. When the IRS assessed the late deposit penalties, the bill was $4,200.

Payroll taxes are the one area where the IRS moves quickly and with real authority. Understanding exactly what you owe, when it is due, and what happens when it is not paid on time keeps this from becoming your problem.

The Two Categories of Payroll Taxes

Every dollar of payroll tax falls into one of two categories: employee-side obligations (amounts you withhold from employee paychecks) and employer-side obligations (amounts you pay directly as the employer).

Both are your responsibility to calculate, track, and remit. The distinction matters because the two categories are taxed differently and because the IRS treats failures in each category differently.

Employee-Side: What You Withhold

These amounts come out of the employee’s gross pay. You are collecting them on behalf of the government.

Federal Income Tax Withholding

Based on each employee’s Form W-4, you withhold federal income tax from every paycheck. The amount depends on filing status, claimed dependents, and any additional withholding the employee elected.

The IRS publishes withholding tables annually in Publication 15 (Circular E). Payroll software handles this calculation automatically. If you are running payroll without software, you need the current tables.

Texas has no state income tax, which simplifies this considerably. You do not withhold any state income tax for Texas employees.

Social Security Withholding

You withhold 6.2% of the employee’s wages for Social Security. The wage base for 2026 is $176,100. Once an employee’s year-to-date wages exceed $176,100, Social Security withholding stops for the rest of the year.

On a $3,500 biweekly paycheck: $3,500 x 6.2% = $217 withheld for Social Security.

Medicare Withholding

You withhold 1.45% of all wages for Medicare. There is no wage cap. Medicare withholding applies to every dollar earned.

For employees earning over $200,000 in the year, an additional 0.9% Medicare surtax applies. This is the employee’s obligation. You are responsible for withholding it once wages cross the $200,000 threshold.

On a $3,500 biweekly paycheck: $3,500 x 1.45% = $50.75 withheld for Medicare.

Employer-Side: What You Owe

These amounts come from your business, separate from the employee’s pay.

FICA Employer Match

You match the employee’s Social Security and Medicare withholding dollar for dollar.

• Social Security match: 6.2% on wages up to $176,100
• Medicare match: 1.45% on all wages

You do not match the 0.9% additional Medicare surtax. That is the employee’s burden only.

On a $3,500 biweekly paycheck: your FICA match is $217 + $50.75 = $267.75.

Combined (employee withholding + employer match), $735 leaves your business for each $3,500 in gross pay. That is 21% of gross wages going to FICA alone.

Federal Unemployment Tax (FUTA)

FUTA is 6% on the first $7,000 of each employee’s annual wages. However, you receive a credit of up to 5.4% if you pay your state unemployment taxes on time, bringing the effective FUTA rate to 0.6%.

For a business with 8 employees in Texas: 8 x $7,000 x 0.6% = $336 in annual FUTA

FUTA is due quarterly if your accumulated liability exceeds $500. If your annual liability is under $500, you can pay with your Form 940 at year end.

Texas Unemployment Insurance (UI)

The Texas Workforce Commission (TWC) administers state unemployment insurance. Texas employers pay UI on the first $9,000 of each employee’s annual wages. Your rate depends on your claims history.

New employers start at 2.7% in most industries. Rates range from 0.31% to 6.31%.

A Houston business with 8 employees at the 2.7% new employer rate: 8 x $9,000 x 2.7% = $1,944 per year

TWC UI taxes are paid quarterly through the Employer Benefits Service portal. Due dates: April 30, July 31, October 31, and January 31.

The Total Payroll Tax Picture

For a Houston small business with 8 employees averaging $3,500 biweekly ($91,000 annual each):

Per pay period, per employee:

• Federal income tax withholding: variable per W-4
• Employee Social Security: $217
• Employee Medicare: $50.75
• Employer Social Security match: $217
• Employer Medicare match: $50.75

Total FICA per employee per pay period: $535.50 (combined employee + employer) Total FICA for 8 employees per biweekly pay run: $4,284

That $4,284 needs to be deposited with the IRS by the applicable deadline, plus federal income tax withholding.

This is the math that catches business owners off guard. The labor cost on your payroll is not just the gross wages. It is gross wages plus your employer-side taxes. A $3,500 paycheck to an employee actually costs your business approximately $3,768 when you add the FICA match.

Deposit Schedules: When the IRS Wants the Money

The IRS does not let employers hold payroll taxes until filing season. Deposits are required on specific schedules based on your total payroll tax liability.

How Your Deposit Schedule Is Determined

The IRS looks at your total payroll tax liability (federal income tax withheld + employee FICA + employer FICA match) during a 12-month lookback period: July 1 of two years prior through June 30 of last year.

For 2026, the lookback period is July 1, 2024 through June 30, 2025.

If your total liability during that period was $50,000 or less, you are a monthly depositor. If it exceeded $50,000, you are a semi-weekly depositor.

Monthly Deposit Schedule

Monthly depositors must deposit all payroll taxes accumulated during a calendar month by the 15th of the following month.

January payroll taxes are due by February 15. February taxes due by March 15. And so on.

This schedule works for newer or smaller businesses. A Houston freelance consulting firm with three employees generating $3,000 to $4,000 in monthly payroll tax liability typically starts as a monthly depositor.

Semi-Weekly Deposit Schedule

Semi-weekly depositors have tighter windows. The deposit timing depends on your payroll payment date:

• Paydays on Wednesday, Thursday, or Friday: Deposit by the following Wednesday
• Paydays on Saturday, Sunday, Monday, or Tuesday: Deposit by the following Friday

If you pay employees on Friday, your payroll taxes for that run are due the following Wednesday. That is five days.

The $100,000 Next-Day Rule

If your payroll tax liability on any single payroll day reaches or exceeds $100,000, you must deposit the next business day. This applies regardless of whether you are normally a monthly or semi-weekly depositor.

Once this threshold is triggered, you automatically become a semi-weekly depositor for the rest of the year and the entire following year.

A fast-growing staffing company in Houston that lands a large contract, doubles headcount overnight, and runs a large payroll can hit this threshold unexpectedly. Knowing the rule prevents the surprise.

EFTPS Is Required

All federal payroll tax deposits must be made through the Electronic Federal Tax Payment System at eftps.gov. You cannot mail a check. You cannot pay at a bank. EFTPS only.

The same-day wire option (called “same-day ACH”) exists for situations where you are approaching a deadline, but it requires your bank to initiate the wire.

Quarterly and Annual Filings

Deposits and filings are two separate obligations. Making your deposits on time does not replace the filing requirement.

Form 941: Quarterly Federal Payroll Tax Return

Filed four times per year. Due dates:

• April 30 (covering January through March)
• July 31 (covering April through June)
• October 31 (covering July through September)
• January 31 (covering October through December)

Form 941 reconciles the payroll taxes you deposited during the quarter against what you owed. It reports total wages paid, federal income tax withheld, employee and employer FICA, and total deposits. If you deposited correctly, the balance due on the 941 is zero.

Small employers with $1,000 or less in annual payroll tax liability can file annually using Form 944 instead of quarterly 941s. The IRS must designate you for Form 944 filing. Do not switch on your own.

Form 940: Annual FUTA Return

Filed once per year, due January 31. Reports your total FUTA liability for the year and credits for state unemployment taxes paid. If your total FUTA liability exceeded $500 during the year, quarterly deposits were required.

W-2s: Annual Employee Wage Statements

Issued to employees by January 31. Filed with the Social Security Administration by January 31 (electronic). Each W-2 must match your quarterly 941 filings. Discrepancies trigger SSA inquiries.

TWC Quarterly Report

Filed with the Texas Workforce Commission by the end of the month following each quarter. Reports total wages paid by employee and calculates your Texas UI tax for the quarter.

Late Deposit Penalties: What They Actually Cost

The IRS calculates late deposit penalties as a percentage of the deposit amount, scaled by how late the deposit is:

Days Late	Penalty Rate
1 to 5 days	2%
6 to 15 days	5%
More than 15 days	10%
Not deposited 10+ days after IRS notice	15%

On a $15,000 payroll tax deposit:

• 3 days late: $300
• 10 days late: $750
• 20 days late: $1,500

The auto shop owner in Pasadena accumulated $4,200 in penalties on two missed deposits over six weeks. That was real money, gone because the system that was handling deposits broke down without a replacement.

The Trust Fund Recovery Penalty

Beyond late deposit penalties, there is a more serious consequence for not remitting payroll taxes.

The trust fund portion of payroll taxes includes federal income tax withheld and the employee’s share of FICA. This money legally belongs to the employees. When you withhold it from their paychecks, you are holding it in trust for the government.

If that money is not remitted, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any “responsible person.” The TFRP equals 100% of the unpaid trust fund taxes. It pierces the corporate veil, meaning it can be assessed personally against the business owner, a bookkeeper with check-signing authority, or any person who controlled financial decisions and chose not to pay.

“Willfully” means knowing the taxes were owed and choosing to pay something else. Using withheld payroll taxes to cover rent, buy inventory, or make loan payments qualifies as willful, even without intent to defraud.

Payroll tax obligations are not ones to fall behind on. They are the one tax category where personal liability for a business debt is explicitly built into the law.

Payroll Software Makes This Manageable

Every penalty scenario described above becomes far less likely with payroll software handling deposits and filings automatically.

Gusto, QuickBooks Payroll, ADP Run, and similar platforms calculate withholding, generate pay stubs, make EFTPS deposits on the correct schedule, and file 941s and W-2s automatically. They notify you when deposits are due and confirm when they are made.

For a 10-person Houston business, payroll software runs $90 to $140 per month. That is cheaper than one month of late deposit penalties on a $10,000 deposit.

If you are running payroll manually or with spreadsheets, the question is not whether a mistake will eventually happen. It is when.

What EZQ Group Handles for Payroll Clients

Our in-house accounting team is supported by licensed CPAs when your situation calls for CPA-level expertise. We set up and manage payroll for Houston small businesses through Gusto and QuickBooks Payroll.

Our payroll service covers employee onboarding, payroll processing, EFTPS deposits, 941 filing, W-2 preparation, and TWC quarterly reporting. We also flag any classification issues we see in your workforce and keep you current on rate changes.

If you are behind on payroll taxes, we can help you understand your options and work toward resolving it. If you are setting up payroll for the first time or transitioning from manual processing, reach out to our team.

You can also call us at (346) 389-5215.