Hiring your first employee is a milestone worth celebrating — and it's also the moment your business takes on a set of tax obligations that didn't exist when it was just you. Payroll taxes trip up more first-time employers than almost any other compliance area, mostly because the terminology mixes taxes you withhold from an employee's paycheck with taxes you pay yourself on top of it. Once you separate the two, the picture gets a lot simpler.
Two very different categories of "payroll tax"
Every payroll run involves two distinct pools of money, and confusing them is the single most common first-time-employer mistake:
| Category | Who actually bears the cost | Examples |
|---|---|---|
| Withheld from the employee | The employee — you're just collecting and forwarding it | Federal income tax, state income tax, the employee's share of Social Security and Medicare |
| Employer-paid, on top of wages | The business — a true added cost of hiring | Employer's share of Social Security and Medicare, federal unemployment tax (FUTA), state unemployment tax (SUTA) |
That second column is the number that actually affects your budget when you're deciding whether you can afford to hire — a $50,000 salary typically costs meaningfully more than $50,000 once employer-side payroll taxes are added.
The core taxes, one at a time
- Social Security and Medicare (FICA). Split evenly — currently 7.65% withheld from the employee and a matching 7.65% paid by the employer, for a combined 15.3%. This is the same total rate a self-employed person pays entirely on their own, which is why S-corp owners pay close attention to how salary is structured.
- Federal income tax withholding. Based on the employee's Form W-4 elections and current IRS withholding tables — this money belongs to the employee, you're only the pass-through.
- Federal unemployment tax (FUTA). An employer-only tax funding unemployment benefits, calculated on a wage base that's typically a small amount per employee per year, though most employers qualify for a credit that reduces the effective rate significantly.
- State unemployment tax (SUTA). Employer-paid in nearly every state, with rates that vary by state and by your business's specific claims history — a new employer typically starts at a standard new-employer rate until they build a history.
- State income tax withholding. Required in most states with an income tax, following that state's own withholding tables.
Budgeting shortcut: a common rough estimate is that employer-side payroll taxes add roughly 7-10% on top of gross wages, though the exact number depends on your state's unemployment rate and whether you're near any wage-base caps. Build that cushion into any hiring decision rather than budgeting off salary alone.
The first-time employer checklist
| Step | What it covers |
|---|---|
| Get an EIN | Required before you can run payroll, if you don't already have one |
| Register for state payroll accounts | State income tax withholding and state unemployment insurance accounts, separate from your EIN |
| Collect Form W-4 and Form I-9 | W-4 sets withholding; I-9 verifies work eligibility — both required before the first paycheck |
| Choose a payroll system | Software or a payroll service that calculates withholding and handles filings — manual calculation is a high-risk shortcut |
| Understand your filing deadlines | Federal deposits are typically due semi-weekly or monthly based on your deposit schedule; quarterly and annual returns (Form 941, Form 940) are also required |
Why "I'll just pay them as a contractor" isn't the workaround it looks like
Misclassifying an employee as an independent contractor to avoid payroll taxes is one of the most heavily scrutinized areas of IRS and state labor enforcement. Classification depends on the actual working relationship — control over how, when, and where the work is done — not on what the paperwork calls it. Getting this wrong can mean back payroll taxes, penalties, and interest, all landing at once. Worth reading alongside this: our guide on 1099 vs W-2 classification before you decide how to bring someone on.
Filing deadlines you can't afford to miss
Payroll tax deposits generally follow a stricter, faster schedule than most other business taxes — often semi-weekly once your payroll reaches a certain size — and the IRS treats late payroll tax deposits more harshly than most other late payments, including personal liability for the responsible party in some cases. This is one area where automation through payroll software genuinely earns its cost; missing a deposit deadline because of a manual tracking error is an expensive, entirely avoidable mistake.
How this fits into your books
Payroll needs its own clean structure inside your chart of accounts — gross wages, each tax liability, and net pay should all be tracked as distinct line items, not lumped into one "payroll" expense. That level of detail is what makes it possible to reconcile what you've withheld against what you've actually remitted, catching an error while it's still a quick fix rather than a year-end surprise.
Payroll taxes are one of the least forgiving areas of small business compliance — the rules are strict, the deadlines are tight, and the penalties for getting it wrong land on the business owner personally in some cases. If you're about to hire your first employee, it's worth setting payroll up correctly from day one rather than untangling it later. Get in touch and we'll help you get it right.
Frequently Asked Questions
What's the difference between employee-withheld and employer-paid payroll taxes?
Withheld taxes (income tax, the employee's share of Social Security/Medicare) belong to the employee — you're just collecting and forwarding them. Employer-paid taxes (the employer's share of Social Security/Medicare, FUTA, SUTA) are an added cost the business bears on top of gross wages.
How much do payroll taxes add to the cost of hiring someone?
A common rough estimate is 7-10% on top of gross wages for employer-side payroll taxes, though the exact figure depends on your state's unemployment rate and other factors. Always budget hiring costs off total cost, not salary alone.
Can I avoid payroll taxes by paying someone as a contractor instead?
Only if the working relationship genuinely meets the legal definition of an independent contractor — control over how, when, and where the work happens is what matters, not what the paperwork says. Misclassification is heavily enforced and can trigger back taxes and penalties.
This article is general information, not personalised tax, legal or accounting advice. Rules and thresholds change — confirm current-year figures with the IRS or a qualified professional before acting. Ask Accounts Buddy if you'd like help applying any of this to your business.