For employers, payday is not just an operational task. It is a legal checkpoint. Each payroll run involves tax calculations, government reporting, and strict deadlines that, if missed, can expose a business to penalties and ongoing scrutiny.
Many payroll issues are not caused by negligence. They happen when withholding rules are misunderstood, reporting deadlines are overlooked, or systems are not built to scale. Knowing what you are responsible for each pay period helps prevent errors before they happen and protects both your business and your employees.
This guide walks through the core federal obligations employers must meet on payday and explains why accurate payroll processes matter long after checks are issued.
Read: Avoiding Payroll Errors, Top Mistakes Employers Make and How to Fix Them
Employers are required to withhold federal income tax from employee wages each time payroll is processed. Withholding amounts are determined by the information employees provide on Form W-4 and the IRS withholding tables in effect for that year.
The IRS outlines calculation methods in Publication 15-T, which accounts for filing status, pay frequency, and additional employee elections. Employees who want to adjust their withholding can use the IRS Tax Withholding Estimator to determine whether changes are needed.
Errors in income tax withholding often occur when W-4 updates are missed or manual calculations are relied on too heavily.
Social Security and Medicare taxes are collectively referred to as FICA taxes. These taxes are split between the employer and the employee.
Employers are responsible for:
Calculating and withholding the employee portion
Paying a matching employer contribution
Depositing the full amount on time
Social Security tax applies only up to the annual wage base limit established by the IRS. Medicare tax applies to all wages with no maximum. Employers must also withhold an additional 0.9 percent Medicare tax once an employee’s wages exceed $200,000 during the calendar year. This additional withholding does not require an employer match.
Accurate tracking is especially important for employees with bonuses, variable pay, or multiple pay rates.
Federal unemployment tax, commonly known as FUTA, is paid solely by employers. Employees do not contribute to this tax.
Employers report FUTA using Form 940 and follow the deposit rules provided in IRS Publication 15-A. FUTA revenue supports federal unemployment programs and works alongside state unemployment insurance systems.
While FUTA rates are relatively modest, missing a filing or deposit can still result in penalties.
Payroll tax obligations extend beyond calculating deductions on payday.
Employers must regularly report wages and taxes to the IRS using employment tax returns, including:
Form 941, filed quarterly to report income tax withholding and FICA taxes
Form 940, filed annually for federal unemployment tax
Tax deposits must be made electronically, most commonly through the Electronic Federal Tax Payment System (EFTPS). Employers may also use approved payroll providers, financial institutions, or same-day wire payments.
Deposit schedules depend on payroll size and prior tax liability, which makes accurate tracking essential.
At the end of the year, employers must prepare a Form W-2 for each employee, summarizing wages and taxes withheld. These forms must be provided to employees by the IRS deadline and transmitted to the Social Security Administration using Form W-3.
Businesses filing 10 or more W-2s are required to submit them electronically through the SSA’s Business Services Online system.
Mistakes at year-end often lead to correction filings and employee confusion, especially if payroll data was inconsistent earlier in the year.
Independent contractors and self-employed individuals handle their own payroll taxes through self-employment tax. This covers both the employer and employee portions of Social Security and Medicare.
While employers do not withhold taxes for contractors, proper classification is critical. Misclassifying workers can result in back taxes, penalties, and legal exposure.
Clear documentation and consistent processes help reduce this risk.
Payroll compliance issues usually stem from complexity, not intent. As teams grow, manual processes become harder to manage and easier to break.
Payroll systems that integrate tax calculations, reporting schedules, and wage tracking reduce the likelihood of errors and provide documentation if questions arise later.
Excelforce’s Payroll platform works alongside Time & Labor and HR Software to help employers calculate pay accurately. For many businesses, automation is the difference between reacting to payroll problems and preventing them altogether.
©2026 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.