Once someone is your employee, you have to withhold income tax plus their share of Social Security and Medicare from every paycheck, match the Social Security and Medicare out of your own pocket, pay federal unemployment tax, and send it all to the IRS on a set schedule with the right forms. That is the real cost of an employee: on top of the wage, you carry about 7.65% for the payroll-tax match plus a small unemployment tax. This is nothing like paying a subcontractor, where you just write a check and file a 1099. This guide is the tax mechanics only. Whether a worker is legally an employee or a sub, and the workers' comp and hiring rules, are separate topics.
First, get set up
You need an EIN (an employer ID number, free from the IRS). Each new hire fills out a Form W-4 so you know how much federal income tax to withhold. There is also an I-9 for work eligibility, but that is an employment-law step, covered elsewhere. From there you are running actual payroll, and this is the point where most contractors hand it to payroll software or a service, because the software does the math and the deposits for you.
What comes out of their check (withholding)
- Federal income tax, based on their W-4. This is their money, you are just the collector passing it to the IRS.
- Their half of FICA: 6.2% for Social Security (up to the wage base) plus 1.45% for Medicare, so 7.65% of their wages. High earners over $200,000 also have an extra 0.9% Medicare withheld, and there is no employer match on that part.
What comes out of your pocket (the employer side)
- The FICA match. You pay the same 6.2% plus 1.45%, another 7.65%, on top of the wage. This is the real added cost of putting someone on payroll.
- FUTA, federal unemployment tax. It is 6% on the first $7,000 of each employee's wages, but if you pay your state unemployment tax on time you get a credit that usually drops it to 0.6%, about $42 per employee for the year. You report it once a year on Form 940.
- State unemployment tax and state income-tax withholding are separate from all of this and vary, so see Working in Your State.
The forms and the deposits
- Form 941, filed quarterly, reports the wages, the income tax withheld, and both halves of FICA.
- Form 940, filed once a year, is the FUTA return.
- Form W-2 goes to each employee and to the Social Security Administration after year end (by January 31), with a Form W-3 summary.
- Deposits. You do not sit on the money you withheld. You deposit it, usually through the EFTPS system, on a monthly or semiweekly schedule the IRS assigns you. This matters more than the forms, because the withheld money is treated as trust-fund money you are holding for the government. Fall behind on deposits and the penalties are among the harshest in the tax code, and the trust-fund recovery penalty can come after you personally, not just the business.
Employee or subcontractor, quickly
If you landed here unsure whether to put someone on payroll or just 1099 them, that is a worker-classification question with real penalties for getting it wrong, and it is covered in the guide on 1099 versus W-2 workers. These payroll taxes only apply to actual employees. Pay a genuine subcontractor and you are back to a W-9 and a 1099-NEC instead.
Common questions
How much does an employee actually cost beyond their wage?
Figure roughly 7.65% on top of the wage for your share of Social Security and Medicare, plus a small federal unemployment tax of about $42 a head. State unemployment tax, workers' comp, and any benefits are extra on top of that. The payroll-tax match is the part contractors most often forget to budget for.
What is the employer's share of Social Security and Medicare?
It is 7.65% of wages: 6.2% for Social Security up to the wage base, plus 1.45% for Medicare with no cap. You match exactly what you withhold from the employee, out of your own pocket. On high earners over $200,000 the employee pays an extra 0.9% Medicare, but you do not match that part.
What payroll forms does a small employer have to file?
Form 941 each quarter for wages and withholding, Form 940 once a year for federal unemployment, and a W-2 for each employee after year end. You also deposit the withheld taxes on a monthly or semiweekly schedule the IRS assigns you, usually through the EFTPS system.
Do I need an EIN to hire someone?
Yes. You need an employer identification number before you run payroll, and it is free from the IRS. Each new hire also fills out a Form W-4 so you know how much federal income tax to withhold from their checks.
What is trust-fund tax and why does it matter so much?
It is the income tax plus Social Security and Medicare you withhold from employees' checks, money you hold in trust for the government. Miss those deposits and the IRS can come after you personally through the trust-fund recovery penalty, not just the business. That is why payroll deposits are the last bill to fall behind on.
The honest bit
- These are 2026 federal figures (7.65% FICA on each side, the $184,500 Social Security wage base, the extra 0.9% Medicare over $200,000, FUTA at 6% on the first $7,000 with the credit down to 0.6%). Verify at irs.gov.
- Getting payroll deposits or forms wrong carries some of the steepest penalties there are, which is exactly why most contractors hand payroll to a service or a bookkeeper. This is general guidance, not tax advice.
- State income-tax withholding, state unemployment tax, new-hire reporting, and workers' comp all sit on top of the federal rules and vary by state. See Working in Your State.
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Templates you might need
Sources
- IRS Publication 15 (Circular E), Employer's Tax Guide · Federal income tax withholding, FICA rates and federal payroll deposit schedules
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