Quick facts
- Employers withhold federal income tax, plus the employee share of social security and Medicare taxes, from wages (IRS Publication 15, 2026).
- 2026 social security tax: 6.2% each for employer and employee on wages up to $184,500; Medicare: 1.45% each, with no wage base limit (IRS Publication 15, 2026).
- Federal unemployment (FUTA) tax is paid by the employer and is not withheld from employee wages.
- FLSA recordkeeping: payroll records must be kept at least three years; wage-computation records such as time cards at least two years (DOL Fact Sheet #21).
What it means in practice
Payroll covers everything that happens between the hours an employee works and the money the employee receives, along with the reporting that follows. For a small business that means working out gross pay, applying the right minimum wage and overtime rules, withholding taxes, paying the employee, depositing the taxes, and filing returns. Whether an employee is covered by overtime depends on classification; see exempt vs. non-exempt employees.
On the tax side, IRS Publication 15 explains that employers withhold federal income tax from wages using the employee's Form W-4, and withhold the employee share of social security and Medicare taxes while also paying a matching employer share. For 2026 the publication lists social security at 6.2% each for employer and employee on wages up to $184,500, and Medicare at 1.45% each with no wage base limit. Federal unemployment tax is paid by the employer only. For more on the social security and Medicare taxes, see FICA.
Withheld and employer taxes then have to be deposited and reported. IRS Publication 15 says deposits follow either a monthly or a semiweekly schedule that depends on a lookback period, and that you must use electronic funds transfer (EFT) for all federal tax deposits. Employers report withheld income tax and social security and Medicare taxes on Form 941 each quarter, and report each employee's wages on Form W-2, filed with the Social Security Administration under cover of Form W-3. The gap between what an employee earns and what is paid out is the difference between gross income and net pay.
Payroll also creates a paper trail. Under the Fair Labor Standards Act (FLSA), the Department of Labor requires employers to keep records for non-exempt employees, including hours worked each day and each workweek, the regular hourly rate, total straight-time and overtime earnings, additions to or deductions from wages, total wages paid each pay period, and the payment date and pay period covered. Payroll records must be preserved for at least three years, and records on which wage computations are based, such as time cards and wage rate tables, for two years.
Federal and state law. This entry describes federal rules only. States and localities can add their own pay-frequency, final-paycheck, withholding, unemployment insurance and recordkeeping requirements, and the federal sources used here do not set a pay-day schedule. Check your state labor and tax agencies before you set up a payroll process.
Why it matters and common mistakes
Common payroll errors include applying the wrong wage base or rate after the annual figures change, not keeping hours and pay records for non-exempt employees, and treating a state rule as if it matched the federal baseline.
Penalties and back-pay exposure for late deposits, incorrect filings or unpaid wages depend on the facts, so confirm them with the IRS, the Department of Labor, your state agencies or a qualified professional rather than relying on a general summary.
How Remindax helps
Remindax helps you track the dates and deadlines tied to payroll deadline and recordkeeping reviews and sends reminders before they're due. Remindax does not provide legal, tax, or HR advisory services, and this page is for general informational purposes only - consult a qualified attorney, accountant, or HR professional for guidance specific to your situation.
Related terms
See all terms in Payroll & Compensation Basics.
Sources & References
- IRS - Publication 15 (2026), (Circular E), Employer's Tax Guide - withholding, social security and Medicare rates and 2026 wage base, FUTA, Form 941, Form W-2, deposit schedules, EFT
- IRS - Employment taxes - kinds of employment taxes: income tax withholding, social security and Medicare, federal unemployment tax
- DOL Fact Sheet #21 - Recordkeeping Requirements under the FLSA - payroll record items; three-year and two-year retention periods
Last reviewed: October 2026. Figures are reviewed annually - see Sources & References for current figures.