How to do Payroll for Your Small Business: An Owner's Guide to Payroll Taxes
If you’ve got employees, there’s no way around payroll taxes. These taxes might seem overwhelming, but we’re here to help you get a handle on the ins-and-outs of how to do payroll for your small business.
What are payroll taxes?
There are three main types of payroll taxes you'll need to handle as a small business owner:
FICA taxes — think of these as your Social Security and Medicare contributions. Both you and your employees chip in 6.2% for Social Security and 1.45% for Medicare. The good news? These rates stay the same for every paycheck, so once you've got the hang of calculating them, you're set.
Income tax withholding — this is the money you hold back from employee paychecks and send to the IRS. The amount varies based on each employee's W-4 form. This helps your employees pay their taxes in installments rather than one big bill on April 15.
FUTA (Federal Unemployment Tax) — this one's all on you as the employer. While it starts at 6% on the first $7,000 of each employee's wages, most business owners end up paying just 0.6%, thanks to a state tax credit. Just make sure you're paying your state unemployment taxes on time to qualify.
Why payroll taxes aren't like other bills
If you take one thing from this article, let it be this: The IRS sees payroll taxes differently from your other business expenses. Why? Because when you withhold taxes from employee paychecks, that money technically belongs to the government — you're just holding onto it temporarily. The IRS takes this very seriously and isn't shy about enforcing the rules.
Common costly mistakes
Let's talk about some payroll tax pitfalls that can trip up small business owners:
Using withheld taxes as a temporary business loan: When cash is tight, it might be tempting to "borrow" from those withheld taxes — but trust us, this is a recipe for disaster.
Classifying employees as contractors: Sure, classifying workers as contractors might seem like a smart way to avoid payroll taxes, but the IRS looks at who's really controlling the work, not what's convenient for you.
Missing deadlines: Even being a day late can trigger penalties — the IRS doesn't mess around with deposit schedules.
Not following the Equal Pay Act: Paying different rates for similar work isn’t just morally wrong, it could be setting you up for legal troubles.
Incomplete information: Incomplete tax forms, missing I-9s, or shoddy payroll records will also cost you.
Forgetting some forms of compensation: Those holiday bonuses and employee perks? They count for tax purposes too.
Getting any of these wrong can cost you big time — we're talking penalties up to 100% of unpaid taxes, personal liability, and in worst-case scenarios, even criminal charges.
Making life easier: Software and professionals
The good news is you don’t have to be an expert in the complexities of payroll to be compliant. Modern payroll software can handle a lot of this heavy lifting for you. Good software will crunch the numbers, keep you on schedule with deposits, generate your forms, and maintain those all-important records. Think of it as your first line of defense against costly mistakes.
Want even more peace of mind? That's where professional payroll services come in. We stay on top of changing tax laws, handle tricky situations like employees working across state lines, and free you up to focus on what really matters — growing your business. And here's a secret: Professional help usually costs way less than what you'd pay in penalties if things go wrong.
Don't let payroll taxes worry you. The payroll pros at Archer Lewis are here to take this burden off your plate. Learn how we can help.