Small Business Payroll Tax & Compliance Guide

The payroll tax map

• Employee withholding: federal/state income tax, Social Security, Medicare.
• Employer taxes: employer share of Social Security/Medicare, FUTA, SUTA, local.

Withholding vs. employer taxes

Employees fund part of FICA via withholding; employers match the FICA share and pay unemployment taxes. Some localities add additional payroll taxes.

Filing & reporting cadence

• Periodic deposits (semi‑weekly or monthly) based on lookback rules.
• Quarterly returns (e.g., federal employment tax returns) and annual W‑2/W‑3.
• State payroll filings for withholding and unemployment.

Cash‑flow planning

Automate deposits, reconcile payroll clearing accounts monthly, and forecast gross‑to‑net to avoid shortfalls.

Registering for payroll

Obtain or confirm your EIN. Register for state withholding and unemployment. Some cities require local registrations.

Choosing software & providers

Evaluate full‑service payroll with automated tax deposits and filings, new‑hire reporting, and benefits integrations.

Pay schedules & policies

Set consistent pay frequencies that comply with state rules. Document PTO, overtime, and reimbursements.

Deposit calendar & automation

Configure deposit frequencies, lookback rules, and alerts. Use dedicated payroll bank accounts to segregate liabilities.

Reconciliation & close

Each pay period, reconcile payroll registers to GL; quarterly, tie out returns to liability and expense accounts; annually, verify W‑2 totals.

Common benefit types

• Health, dental, vision; HSAs/FSAs
• Retirement plans (401(k), SIMPLE, SEP)
• Life/disability insurance
• Education assistance, commuting, de minimis benefits

Taxable vs. excludable

Some benefits are excluded from employee income if plan and nondiscrimination rules are met; others must be taxed via payroll.

Reporting & payroll handling

Set up pre‑tax vs. post‑tax deductions correctly; include taxable benefits in wages and withhold/pay applicable payroll taxes.

Plan design & strategy

Choose benefits that fit your hiring goals and budget; consider safe‑harbor retirement plans for simpler administration.

Eligibility foundations

At a high level, ERC analysis considered operational disruptions or significant declines in gross receipts, with special rules for startups.

Qualified wages & health costs

Definitions varied by employer size; health plan expenses often counted. Coordinate with PPP forgiveness and other credits to avoid double‑dipping.

Aggregation & related entities

Common ownership may require grouping entities for headcount and eligibility tests; apply controlled group rules carefully.

Documentation & risk management

Maintain memos, gross‑receipt calculations, government‑order references, payroll reports, and amended return copies. Watch for promoter‑driven risks.

Top risk areas

• Late or missed deposits
• Using withheld taxes as working capital
• Misclassification of workers
• Unreconciled payroll liability accounts

Penalty types

• Failure‑to‑deposit penalties (tiered by lateness)
• Failure‑to‑file & failure‑to‑pay penalties
• Trust Fund Recovery Penalty (personal liability)

Abatement & reasonable cause

First‑Time Abatement may apply in certain cases. Reasonable‑cause letters should explain facts, timelines, and corrective actions.

Controls & best practices

• Dual approvals for deposits and return filings
• Calendar reminders & deposit threshold monitoring
• Monthly reconciliations of 941/940 and state accounts