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Your Payroll Tax Checklist

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David N

Payroll is a balance of contributions and deductions — all of which are affected by labor and tax laws on a federal, state, and local level. This step-by-step checklist will also walk you through the questions to ask and the rules you should follow:

Table of Contents

STEP 1 - Comply with Minimum Wage, Overtime, and Payday Laws

Q: Is there a state or local minimum wage law?

  • If the answer is yes and the wage is higher than the federal standard of $7.25 per hour, workers are entitled to higher wages.
  • If the answer is no, the federal standard applies.

Q: Is there a state or local overtime law?

  • If the answer is yes, then you must follow the state and local mandates.
  • If no, then the federal standard of time and a half after 40 hours applies.

Q: Is there a state or local requirement for how often you should pay your employees?

  • If the answer is yes, then your payroll schedule, weekly, bi-weekly, semi-monthly, or monthly must be in alignment with these laws.
  • If there are no laws, you may use any of the commonly used frequencies.

Alabama, Florida, and South Carolina are the only states without payday frequency laws.

STEP 2 - Withhold the Right Amount of Income Tax

Fact: Federal income tax is a given for every business

  • Make sure you’re using the correct employer withholding tables.
  • They’re issued in IRS Publication 15 (Circular E) Employer’s Tax Guide each year.
  • You must also promptly deposit these funds with the IRS.

Q. Is there a state income tax?

  • If the answer is yes, then you must withhold the proper income tax amounts at the state level.
  • You can find the appropriate withholding tables on the state tax authority website— search “employer withholding tables” and your state name.
  • You must also promptly deposit these funds with the state’s Department of Revenue

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax. Tennessee and New Hampshire only tax dividends and interest income, but not wages.

Q. Are there local income and other taxes?

  • If the answer is yes, then you must withhold the proper income tax amounts at the local level.
  • Some counties and cities also have taxes for school boards, transportation services, and other initiatives— which may be employer- or employee-paid or a combination of both.
  • You must also promptly deposit these funds with the proper local tax agencies.

STEP 3 - Account for Bonus Wages and Qualified Deductions When Calculating Income Tax

Q. Have you offered your employees bonuses, commissions, overtime pay, back pay, and accumulated sick pay that are considered taxable income?

  • If you have, these incomes are subject to:
  • A 22% flat rate at a federal level.
  • Bonus wages over $1 million are subject to a rate of 37%.
  • Any state and local withholding amounts.
  • Are there any qualified contributions, like health savings accounts and retirement accounts (401Ks), that are taken from an employee’s pay before calculating income tax withholding?
  • On a federal level, there are set contribution amounts for health savings and retirement plans.
  • You must also be aware of related state and local contribution limits.

STEP 4 - Withhold and Contribute FICA Taxes

Fact: Just like federal income taxes, Federal Insurance Contribution Act (FICA) taxes, Medicare and social security, are a fact of life.

  • FICA taxes are split evenly in terms of employee withholding and employer contributions amounts:
  • Medicare — 1.45% each for the employer and employee.
  • Employees earning over $200,000 pay an additional .9%.
  • Employers do not have to pay any additional rates for higher-earning employees.
  • There’s no earnings limit for Medicare.
  • Social security — 6.2% each for the employer and employee.
  • The maximum taxable earning amount is $168,600 for 2024 and $176,100 for 2025
  • The employer is responsible for:
    • Processing both the employee and employer amounts with each payroll.
    • Passing these funds to the IRS in a timely manner.
    • Reporting FICA contribution amounts each quarter.

STEP 5 - Pay Federal (FUTA) and State Unemployment (SUTA) Taxes

Fact: FUTA and SUTA are payroll taxes that are 100% employer-paid

  • Every state has a state unemployment (SUTA) tax.
  • In a majority of states, the employer pays the full amount.
  • In Alaska, New Jersey, and Pennsylvania employers must also withhold amounts from employees.
  • SUTA tax rates and maximum taxable earnings vary by state.
  • New employers are subject to specific rates for a set period of time.
  • More than half of the states allow employers to make voluntary contributions toward future taxes in order to earn lower rates over time.
  • SUTA is usually paid to the state Department of Labor.
  • Employers are also required to submit quarterly wage detail reports as part of the SUTA process.

The FUTA tax rate is 6% on the first $7,000 in wages.

  • Employers can claim up to 5.4% credit for FUTA, as long as all of the SUTA taxes were paid on time. This deduction reduces the net rate for FUTA to .6%.
  • FUTA is paid to the IRS.

STEP 6 - Follow Workers’ Compensation and Disability Insurance Rules

Fact: Workers’ Compensation is required in every state, except Texas.

  • The requirement, based the number of employees, varies by state.
  • Some states require coverage once you hire your first employee, others set the starting point at five employees
  • Depending on state laws, coverage can be purchased from private carriers or a state-run fund.
  • Many states will also give businesses the option of becoming self-insured.
  • Employers pay the premiums.

Disability insurance is required in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island.

STEP 7 - Get All the Proper Business Tax IDs

Fact: These ID numbers are what the tax authorities use to identify your business.

  • For federal taxes, you’ll need an IRS Employer Identification Number (EIN).
  • For state income taxes, you’ll need an ID number with the state revenue or tax department.
  • For the state unemployment tax, you may also need an ID number with the state labor department.
  • Some states have harmonized registration that lets you get only one ID or register for all the IDs you need in one place.

STEP 8 - Keep Up With Required Reporting.

Fact: Mandatory reporting requirements are another key component of payroll and payroll taxes.

  • Federal income tax, Medicare, and social security taxes must all be reported to the IRS on a quarterly basis using Form 941.
  • Federal unemployment tax (FUTA) is reported annually using Form 940.
  • Wage detail reports must be submitted on a quarterly basis to the state labor departments.
  • New hires must be reported to the state Department of Labor within 1 - 2 weeks of all hires and rehires.
  • Income and payroll taxes are reflected in the year-end W-2s that employers must submit to the Social Security Administration (SSA) and send to employees by January 31 each year.

STEP 9 - Stay Informed

Fact: Federal, state, and local laws and tax rates are subject to changes and updates.

  • Any federal-level changes to minimum wage and overtime will generally get a lot of publicity.
  • Many states have scheduled updates to their minimum wage laws.
  • Most annual increases are scheduled for January, July, or October 1.
  • Any changes to income tax rate tables are usually announced at the end of the year (Q4), before being put in place at the start of the year (Q1).
  • There are always exceptions, so make sure you have ways of staying informed by following national news outlets, small business experts, and state-specific sources

STEP 10 - Get Help

IRS Website:

  • Visit the IRS.gov website for comprehensive guidelines on payroll taxes, including federal income tax, Social Security, Medicare, and unemployment taxes.

Form W-4:

  • Ensure employees complete Form W-4, Employee’s Withholding Certificate, to determine the amount of federal income tax to withhold from their pay.

State and Local Tax Resources:

  • Check your state's Department of Revenue or state taxation website for state-specific payroll tax guidelines, rates, and reporting requirements.
  • Review local tax authorities’ websites for any applicable local or city payroll taxes.

Social Security Administration (SSA):

  • Visit the SSA for guidance on Social Security tax rates, reporting requirements, and wage base limits.

IRS Publication 15 (Circular E):

  • Refer to IRS Publication 15, Circular E, for detailed instructions on employer responsibilities for withholding and depositing federal payroll taxes.

IRS Online Account:

  • Create and maintain an IRS online account for tracking payments, balances, and other tax information.
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