Payroll Liabilities: What It Means for Employers

What it means in practice

Running payroll creates debts that outlast payday. IRS Publication 15 (2026) puts it this way: "When you pay your employees, you don't pay them all the money they earned." Add the employer's own taxes and the other amounts taken out as a payroll deduction, and the total is what an employer owes until each amount reaches the right agency or plan.

Who has them. Publication 15 says most employers must withhold (except FUTA), deposit, report and pay income tax, Social Security tax, Medicare tax and FUTA tax. Under the general FUTA test, an employer owes FUTA tax in 2026 if it paid wages of $1,500 or more in any calendar quarter in 2025 or 2026, or had one or more employees for some part of a day in 20 or more different weeks in either year. Household and farm employers have separate tests.

1. Amounts withheld from employees. Federal income tax is withheld based on each employee's Form W-4, and the employer "shall be liable for the payment of the tax required to be deducted and withheld" (26 U.S.C. 3403). The employee share of FICA is collected "by deducting the amount of the tax from the wages as and when paid," and the employer is liable for it (26 U.S.C. 3102). For 2026 that is 6.2% Social Security tax up to the $184,500 wage base and 1.45% Medicare tax on all covered wages. Employers must also withhold 0.9% Additional Medicare Tax on wages paid to an employee above $200,000 in a calendar year; there is no employer share of that tax (Pub 15 (2026)). Publication 15 warns that if you withhold less than the correct tax, "you're still liable for the full amount."

2. Taxes the employer owes itself. The employer pays a matching 6.2% Social Security tax and 1.45% Medicare tax (26 U.S.C. 3111; Pub 15). FUTA is a federal tax of 6 percent of wages (26 U.S.C. 3301), applied to the first $7,000 paid to each employee in the year; "Only the employer pays FUTA tax; it isn't withheld from the employee's wages" (Pub 15, section 14). State unemployment insurance tax is a separate employer liability: the Department of Labor says state law determines state UI tax rates and that the state tax is used solely to pay benefits to eligible unemployed workers.

How the FUTA credit works. Employers can credit amounts paid into state unemployment funds against FUTA tax. Publication 15 says the maximum 5.4% credit applies if the employer paid state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA, and the state is not a credit reduction state. With the full credit the rate is 0.6%, which DOL notes is a maximum FUTA tax of $42.00 per employee per year ($7,000 x 0.006). Some states exclude wages from state unemployment tax that FUTA still taxes, such as wages paid to corporate officers, and Pub 15 says more than 0.6% FUTA tax may then be due on those wages.

Credit reduction states. The IRS explains that a state becomes a credit reduction state if it has outstanding federal unemployment loan balances on January 1 for two consecutive years and does not repay them in full by November 10 of the second year. The reduction is 0.3% for the first year, another 0.3% for the second, and an additional 0.3% for each later year until the loan is repaid, and further add-on reductions may apply. Any added FUTA owed because of a reduction is treated as incurred in the fourth quarter and included with the fourth quarter deposit (IRS FUTA credit reduction page; Pub 15). DOL's table of actual reductions lists California at 1.2% and the U.S. Virgin Islands at 4.5% for 2025. For 2026, DOL lists California and the Virgin Islands as potential credit reduction states because they had advance balances on January 1, 2026; the final 2026 figures depend on whether the advances are repaid by November 10, 2026.

3. Other amounts owed to third parties. Federal child support law requires states to make an employer that receives an income withholding notice withhold the amount specified and pay it to the state disbursement unit within 7 business days after the date the amount would have been paid to the employee, and to hold the employer liable to the state for any amount it fails to withhold after proper notice (42 U.S.C. 666(b)(6)). A person who fails to surrender wages subject to an IRS levy is personally liable for the value not surrendered, up to the tax being collected (26 U.S.C. 6332(d)). See wage garnishment for the withholding limits.

Benefit deductions. Employee contributions withheld for a retirement plan become plan assets "as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets," and for a pension plan never later than the 15th business day of the month after the month the amount would have been paid to the employee in cash. For plans with fewer than 100 participants, a deposit by the 7th business day after the amount would have been paid is a safe harbor. Contributions to a welfare benefit plan have a maximum of 90 days (29 CFR 2510.3-102). Publication 15 lists 401(k) elective deferrals as generally exempt from income tax withholding but subject to Social Security, Medicare and FUTA tax.

When a liability arises. Publication 15 says federal deposit rules "are based on the dates when wages are paid (cash basis), not on when tax liabilities are accrued for accounting purposes."

Deposit schedules at a glance. Before each calendar year, an employer determines whether it is a monthly or semiweekly schedule depositor from the taxes it reported in a four-quarter lookback period running July 1 through June 30. $50,000 or less makes it a monthly depositor; more than $50,000 makes it semiweekly. The schedule is not set by how often you pay employees, and a new employer is a monthly depositor for its first calendar year. Monthly depositors deposit a month's taxes by the 15th of the following month. Semiweekly depositors deposit taxes for Wednesday, Thursday or Friday paydays by the following Wednesday, and for Saturday through Tuesday paydays by the following Friday. All federal tax deposits must be made by electronic funds transfer (Pub 15 (2026), section 11).

The $100,000 next-day rule. If an employer accumulates $100,000 or more in taxes on any day during a deposit period, it must deposit by the next business day, whatever its schedule. A monthly depositor that hits $100,000 becomes a semiweekly depositor the next day for at least the rest of that year and the following year (Pub 15 (2026)).

Small shortfalls and small liabilities. Under the accuracy of deposits rule, no penalty applies to a shortfall that does not exceed the greater of $100 or 2% of the taxes due, if it is made up by the shortfall makeup date. FUTA works differently: it is figured quarterly, and a quarter's liability of $500 or less can be carried forward until the cumulative amount is more than $500 (Pub 15 (2026)).

Failure-to-deposit penalty. The IRS charges 2% of the unpaid deposit for deposits 1 to 5 calendar days late, 5% for 6 to 15 days, and 10% for more than 15 days. The rate is 15% for amounts still unpaid more than 10 days after the first IRS notice or on the day the employer receives a notice and demand for immediate payment. The tiers "don't add up": a deposit 20 days late draws 10%, not 17% (IRS Failure to Deposit Penalty page; 26 U.S.C. 6656). The penalty does not apply if the failure was due to reasonable cause and not willful neglect, and the IRS may waive it for an inadvertent failure in the first quarter an employer must deposit, subject to the conditions in 26 U.S.C. 6656(c).

Trust fund recovery penalty. If withheld taxes are not paid and cannot be immediately collected from the business, the IRS may assess the trust fund recovery penalty (TFRP) against any responsible person who willfully failed to collect or pay them, even if the business is still operating. The IRS says a responsible person has "the duty to perform and the power to direct" collecting and paying trust fund taxes, such as an officer, partner, director or payroll service provider. Willfulness needs no "evil intent," and using available funds to pay other creditors is an indication of it. The penalty equals the unpaid income tax withheld plus the employee share of FICA. It does not include the employer share. A person gets a letter and has 60 days to appeal before assessment; once the penalty is asserted, the IRS can file a federal tax lien or levy personal assets (IRS TFRP page; 26 U.S.C. 6672). Willful failure to collect or pay over tax is also a felony punishable by a fine of up to $10,000, up to 5 years in prison, or both (26 U.S.C. 7202).

Worked example 1: one payroll. A Remindax illustration with assumed figures: a new California employer pays four employees $3,000 each ($12,000 gross) on Friday, January 9, 2026, its first payroll of the year. Assume federal income tax withholding of $1,000 and California income tax withholding of $250, 401(k) deferrals of $600, and one $250 child support order. Withheld for the IRS: $1,000 income tax, $744 Social Security (6.2%) and $174 Medicare (1.45%), or $1,918 of trust fund taxes; the deferrals do not reduce the FICA base. Employer share: another $744 and $174, for a federal deposit of $2,836. FUTA: $12,000 x 0.6% = $72, assuming the full credit. California: $408 UI at the 3.4% new employer rate, $12 ETT at 0.1%, plus $156 of SDI withheld at 1.3% and the $250 of state income tax. Also owed: $600 to the 401(k) plan and $250 to the state disbursement unit. Total liabilities from this payday: $4,584. Net pay is $8,826.

Worked example 2: timing. As a new employer it is a monthly depositor, so January taxes are due by February 15, 2026. That day is a Sunday and February 16 is Washington's Birthday, a listed legal holiday, so a deposit on Tuesday, February 17 is timely. The $72 of FUTA is under $500, so it carries forward. If the employer ran 26 such payrolls from July 2026 through June 2027, its lookback taxes would be about $73,736 (26 x $2,836), over $50,000, so it would deposit semiweekly in 2028.

Worked example 3: what a mistake costs. If the $2,836 deposit is made 10 days late, the penalty is 5%, or $141.80. If it is still unpaid more than 10 days after the first IRS notice, the rate is 15%, or $425.40. The trust fund portion, $1,918, is what a TFRP could reach personally. For credit reduction, the Schedule A (Form 940) instructions multiply FUTA taxable wages by the reduction rate. For four employees with $7,000 each of 2025 California wages, that is $28,000 x 1.2% = $336 of added FUTA, on top of $168 at 0.6%.

Where states differ. DOL says some state unemployment laws differ from federal law and points employers to their state workforce agencies. As an example, California EDD states that new employers get a 3.4% UI rate for two to three years, that the 2026 rate schedule (Schedule F+) runs from 1.5% to 6.2%, and that the UI and ETT taxable wage limit is $7,000 per employee. It also lists a 2026 ETT rate of 0.1% and a 2026 SDI withholding rate of 1.3% with all wages subject to SDI.

Recordkeeping. Publication 15 says to keep all employment tax records for at least 4 years, including amounts and dates of wage payments and dates and amounts of tax deposits; each EFT deposit generates a trace number that serves as a receipt.

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