Payroll is where small-business tax administration gets serious. Income tax mistakes cost penalties; payroll tax mistakes can cost the owner personally, because taxes withheld from employees are trust funds the government treats as its money in your custody. The system is entirely manageable, but it rewards setting it up correctly before the first paycheck rather than reverse-engineering it after.
This guide covers the one-time setup, the true cost of an employee, the recurring calendar, and the first-hire checklist. It assumes an entity and EIN already exist; if not, start with the formation guide.
The One-Time Setup, in Order
Then, for every hire: a Form W-4 (their withholding elections), a Form I-9 with identity documents within three days of the start date (kept on file, not filed), state new-hire reporting within about 20 days (varies by state), and a wage notice where the state requires one. Classification matters before any of this: if the worker is actually an independent contractor, none of the payroll machinery applies, and the tests are covered in contractor vs employee.
What an Employee Actually Costs
The wage is the floor, not the price. On top of gross pay, the employer pays: the 7.65% FICA match, which is 6.2% Social Security on wages up to the 2026 base of $184,500 plus 1.45% Medicare with no ceiling, federal unemployment (FUTA: 6% of the first $7,000, reduced to an effective 0.6% in states with full credit), and state unemployment at your assigned rate, typically 1% to 4% for new employers on a state-specific wage base. Add workers' comp (industry-rated: cents per $100 of payroll for office work, dollars for construction), and software. The practical planning number: wages plus 10% to 15%. Run scenarios in the payroll tax calculator.
From the employee's check you also withhold (but do not pay): federal income tax per the W-4, their 7.65% FICA share, and state income tax where applicable. Withholding is the trust-fund money: it was never yours, and the LLC's liability shield explicitly does not cover it.
Compliance monitoring
If you would rather not do this yourself, we track every deadline for your entity and file on time, in every state where you are registered. Or keep reading and file it on your own. This guide covers everything you need either way.
The Recurring Calendar
Deposits. Federal withholding and FICA deposit on an IRS-assigned schedule: monthly (by the 15th of the following month) for smaller liabilities, semiweekly for larger ones, determined by a lookback period. States run parallel schedules for their withholding.
Quarterly. Form 941 reconciles the quarter (due April 30, July 31, October 31, January 31); state unemployment reports file quarterly with the SUI payment.
Annually. Form 940 (FUTA) by January 31; W-2s to employees and the SSA by January 31; 1099-NEC to contractors by the same date, now required at $2,000 or more rather than $600 for tax years beginning after 2025. State reconciliations vary.
Software exists because this calendar is relentless rather than difficult. Every mainstream payroll platform calculates, deposits, and files all of the above automatically; the owner's job reduces to approving payroll runs and keeping the bank account funded on deposit dates.
Deposit Schedules, and the Rule That Reaches the Owner
Depositing is where payroll stops being administration and starts being risk, so it is worth understanding rather than delegating blindly to software that will do it correctly anyway.
The IRS assigns every employer to one of two schedules using a lookback period, which is the four quarters ending the previous 30 June. Report $50,000 or less of employment tax in that window and you are a monthly depositor: everything withheld in a calendar month is due by the 15th of the following month. Report more and you become a semiweekly depositor, where Wednesday, Thursday and Friday paydays deposit by the following Wednesday and Saturday through Tuesday paydays deposit by the following Friday. A separate rule overrides both: accumulate $100,000 or more of undeposited employment tax on any day and it is due by the next business day, and that event also moves you to semiweekly for the rest of the year and the whole of the next one.
The schedule can change underneath you. A business that grows through the lookback threshold gets reassigned on 1 January, and the notice is easy to miss. This is why running payroll through software rather than a bank transfer matters more than the monthly fee suggests: the platform tracks the assignment and the calendar so nobody has to.
Underneath all of it sits the distinction that makes payroll different from every other tax. The employee's income tax withholding and their half of FICA never belonged to the business. They are trust fund taxes, held for the government. If they are not paid over, the IRS can assess the trust fund recovery penalty against any person who was responsible for collecting and paying them and who wilfully failed to do so, in an amount equal to the entire unpaid trust fund balance. Responsible person covers officers, employees, partnership members, directors and payroll service providers, and wilfulness includes paying other creditors while knowing the payroll tax is unpaid. No LLC or corporation stands between the owner and that assessment, which is the sense in which the usual pass-through logic does not apply here.
Payroll Penalties, Tier by Tier
Late deposits are priced by how late they are, not by how much they are, and the tiers do not stack. Only the highest applicable one applies.
| How late the deposit is | Penalty | On a $9,400 deposit |
|---|---|---|
| 1 to 5 calendar days | 2% of the unpaid deposit | $188 |
| 6 to 15 calendar days | 5% of the unpaid deposit | $470 |
| More than 15 calendar days | 10% of the unpaid deposit | $940 |
| More than 10 days after the first IRS notice | 15% of the unpaid deposit | $1,410 |
The quarterly return carries its own penalties on top. A Form 941 filed late runs 5 percent of the unpaid tax a month to a 25 percent cap, and tax paid late runs 0.5 percent a month to the same cap. Form 940 for federal unemployment is due 31 January, extended to 10 February if every FUTA deposit was made on time. FUTA itself is 6.0 percent of the first $7,000 of each employee's wages, and the state unemployment credit of up to 5.4 percent takes the effective rate to 0.6 percent, which is $42 a head. Lose the credit by not paying state unemployment and the federal bill goes up tenfold on the same wages. The return-level mechanics are in the 941 and 940 guide.
Classification errors carry a different bill again. Where a worker was treated as a non-employee without intentional disregard, section 3509 sets reduced rates of 10.68 percent of wages where the Forms 1099 were filed and 13.71 percent where they were not. That is the cheapest argument there is for filing the information returns even when you believe the worker is genuinely a contractor. The tests are in contractor versus employee.
Two More Payrolls, Two Different Failures
The setup example above is what it looks like when the system is built before the first payday. These two are what it looks like when it is not.
Example 2 - the deposit that slipped twice
Steadman Ridge Landscaping LLC runs a crew that triples between April and September. As a monthly depositor, its July employment tax of $9,400 was due by 15 August and went out on 27 August, twelve days late, drawing the 5 percent tier. The August deposit of $11,200 went out 22 days late and drew 10 percent. Neither was a cash problem. Both were a calendar problem in the busiest weeks of the year.
Outcome: Automated deposits through payroll software would have cost less for the year than the two penalties cost in a fortnight.
Example 3 - the withholding that was treated as working capital
Tinsmith Lane Veterinary PLLC hit a cash squeeze after an equipment purchase and stopped depositing. Payroll still ran, so employees saw correct net pay and correct withholding on their payslips. Across three quarters, $38,000 of withheld income tax and employee FICA was used to pay suppliers instead. That $38,000 is trust fund money, and paying other creditors while knowing it was unpaid is the textbook definition of wilfulness.
Outcome: If cash is short, the payroll account is the last thing to touch, not the first. Talk to the IRS before the quarter closes; an instalment agreement on employment tax exists and is far cheaper than a personal assessment.
The Payroll Mistakes That Actually Hurt
Mistake 01
Why it happensWithheld taxes sit in the account looking like cash flow.
ConsequenceEscalating penalties, and personal liability for the trust fund portion, shield or no shield.
PreventionLet software deposit automatically; treat the money as gone the moment payroll runs.
Mistake 02
Why it happens1099s skip the taxes, insurance, and paperwork.
ConsequenceBack payroll taxes, penalties, benefits claims, state audits.
PreventionApply the tests honestly: the classification guide.
Mistake 03
Why it happensTwo obscure registrations nobody mentions at hiring time.
ConsequencePenalty notices and interest from an agency you did not know existed.
PreventionThe five-step setup above, completed before the first payday.
Mistake 04
Why it happensPremiums feel optional at small scale.
ConsequenceState fines plus uncapped personal exposure for a workplace injury.
PreventionCoverage effective on or before the start date, nearly everywhere, from employee one.
A First Hire, End to End
Example · First employee
Copperkettle Bakehouse LLC registers for state withholding and SUI (two online applications, one afternoon), binds a workers comp policy, connects payroll software, and collects the W-4 and I-9 on day one. The employer add-on on a $46,000 wage is $3,519 of FICA match, $42 of FUTA at the credited 0.6 percent on the first $7,000, $243 of state unemployment at 2.7 percent on a $9,000 state base, roughly $690 of workers comp at a bakery rate, and $1,020 of software. The software files the new-hire report, schedules monthly deposits, and queues the quarterly 941.
Outcome: Every filing lands automatically; the owner's only recurring duties are approving payroll and keeping the account funded on deposit dates.
Register first, automate immediately, never touch the withholding
Payroll is five registrations, two hiring forms, and a calendar that software runs better than humans do. The single non-negotiable: withheld taxes are not your money, and they are the one liability that follows an owner personally.
Frequently asked questions
How do I set up payroll for my small business?
Six registrations and documents: an EIN from the IRS, a state income tax withholding account, a state unemployment insurance (SUI) account, workers' compensation coverage, then a W-4 and I-9 from each employee at hire, plus new-hire reporting to your state. After that, payroll runs on a deposit-and-filing calendar, which software automates.
How much does payroll cost a small business?
Beyond wages: employer payroll taxes add roughly 8% to 11% (7.65% FICA match, 0.6% effective FUTA after credits, plus state unemployment, commonly 1% to 4% for new employers), workers' comp premiums vary by industry, and payroll software runs $40 to $150+ per month. Budget wages plus about 10% to 15%.
What payroll taxes does an employer pay?
The employer match of FICA (6.2% Social Security + 1.45% Medicare = 7.65%), federal unemployment (FUTA: 6% on the first $7,000 per employee, usually 0.6% after state credits), and state unemployment insurance at your assigned rate. You also withhold, but do not pay, the employee's income tax and FICA share.
What is Form 941 and when is it due?
The quarterly federal return reconciling wages paid, income tax withheld, and both halves of FICA. Due the last day of the month after each quarter: April 30, July 31, October 31, January 31. The actual tax deposits happen earlier, on a monthly or semiweekly schedule the IRS assigns. Small employers with tiny liabilities may qualify for annual Form 944.
Can I pay myself through payroll in my LLC?
Only if the LLC elected S-corp or C-corp taxation: then owner wages run through payroll like any employee's, and a reasonable salary is required for S-corps. Default LLC members are not employees and take owner draws instead, paying self-employment tax through quarterly estimates. See reasonable salary rules.
What happens if I miss a payroll tax deposit?
Penalties scale fast: 2% for deposits 1-5 days late, 5% for 6-15 days, 10% beyond that, plus interest. Worse, withheld employee taxes are trust fund taxes: the responsible person is personally liable for them, and the LLC's liability shield does not apply. Payroll deposits are the one bill never to float.
Do I need workers' comp for my first employee?
In almost every state, yes: most require coverage from the first employee (a few exempt very small headcounts, and rules differ for owners themselves). It is state-regulated insurance purchased privately or through state funds. Skipping it brings fines and personal exposure for workplace injuries.
Hiring? Get the entity side ready first.
EIN, entity formation, and the compliance calendar that keeps state filings current while payroll software handles the paychecks. The registrations below assume an entity that exists and is in good standing.
This guide is written from the official sources below. Fees, forms, and deadlines change; confirm the current requirement with the agency before you file.
Disclosure. File.Business is a private filing service, not a government agency and not a law firm. We prepare and submit filings at your direction, and nothing on this page is legal or tax advice. Filing fees, deadlines, and statutory references are current as of the last-updated date shown above and can change. Confirm current requirements with the relevant state agency before you file.
