What payroll taxes do I owe when I hire my first employee?

Hiring your first employee adds several obligations: withholding income tax and the employee's share of Social Security and Medicare, paying the employer's matching share, paying federal and state unemployment tax, depositing those amounts on a schedule, and filing quarterly and annual payroll returns. You also need an EIN and each employee's Form W-4.

Key points

An employer withholds federal income tax and the employee's share of Social Security and Medicare from each paycheck and pays a matching employer share of Social Security and Medicare.
Federal unemployment tax is paid entirely by the employer and reported annually on Form 940, and most states add a state unemployment tax.
Withheld taxes are trust-fund money deposited on a monthly or semi-weekly schedule, and a missed deposit is penalised more severely than a late income tax payment.
Employment taxes are reported quarterly on Form 941, and each employee receives a Form W-2 after year end.
Before the first payroll runs, an employer needs an EIN, a Form W-4 from each employee, and a decision on whether the worker is an employee or a contractor.

What taxes does an employer owe on a first employee?

A first hire converts an owner from a self-employed filer into an employer, and the obligations arrive together. From each paycheck you withhold federal income tax based on the employee's Form W-4 and the employee's share of Social Security and Medicare tax, and you pay a matching employer share of Social Security and Medicare on the same wages as defined in section 3121.

On top of that you owe federal unemployment tax, paid entirely by the employer on the first slice of each employee's annual wages, and in most states a state unemployment tax whose rate is assigned to the business. Most states also require state income tax withholding, which is registered and remitted separately from the federal system.

How and when are payroll taxes deposited?

Withheld amounts are not yours to hold. They are trust-fund money and must be deposited through the Electronic Federal Tax Payment System on a set schedule, monthly or semi-weekly depending on the total tax reported in a lookback period, with a next-day rule once a single accumulation is very large. A new employer starts on the monthly schedule.

Missing a deposit is treated far more seriously than a late income tax payment, because the money belonged to the employees and the government. Failure-to-deposit penalties escalate with lateness, and section 6672 allows the IRS to assess the trust-fund portion personally against any responsible person, including an owner, regardless of the entity that employed the worker.

What forms and filings does payroll require?

The paperwork follows a rhythm. Before the first payroll: an EIN, a Form W-4 from each employee, state withholding and unemployment registrations, and the state new-hire report. Each quarter: Form 941 reporting wages, withholding, and both shares of Social Security and Medicare. Each year: Form 940 for federal unemployment tax, and a Form W-2 to each employee with Form W-3 to the Social Security Administration by the end of January.

Most owners run this through a payroll provider precisely because the deposit timing and filings are unforgiving. Workers' compensation insurance, required in nearly every state once there is an employee, is arranged through an insurance agent rather than through payroll.

What are the limits, and what should be decided first?

Two decisions belong before the first payroll runs, not after. Whether a worker is properly an employee or a contractor changes everything above; a contractor receives a 1099-NEC and no withholding, but a misclassified worker exposes the business to back payroll tax, penalties, and interest. And how the owner's own compensation is set, especially after an S-corporation election, determines what runs through the same payroll system.

A payroll provider handles calculation and filing but does not take on the legal liability; the employer remains responsible for deposits the provider fails to make. Sole proprietors and partners are not employees of their own business and cannot be put on its payroll, so the owner's Social Security and Medicare continue to run through self-employment tax instead.