Federal Tax Withholding from Employee Paychecks: A Small Business Owner’s Guide

You have a W-4 on file. Your first payroll is coming. Here's how to withhold the right amount, send it to the Internal Revenue Service (IRS) on time, and explain it when your employee asks about their paycheck.

‍The Three Federal Taxes on Every Employee Paycheck‍

Every paycheck has three federal taxes. Federal income tax changes based on each employee's W-4 Employee’s Withholding Certificate. Social Security tax and Medicare tax stay at fixed rates.

‍Federal Income Tax

‍Federal income tax withholding is variable. You'll calculate a different amount for each employee, every pay period. The employee's W-4 form tells you their filing status and adjustments. IRS Publication 15-T gives you the withholding tables. That's all you need.

‍Social Security and Medicare (FICA)

‍FICA (Federal Insurance Contributions Act) is simpler. The rates don't change: 6.2% for Social Security tax, 1.45% for Medicare tax. 

Every employee pays the same percentage. You withhold their share and match it from your payroll budget.

For an employee earning $40,000 a year, your FICA match is $3,060 per year, or $117.69 per biweekly paycheck.

‍Federal Unemployment Tax (FUTA)

‍Federal Unemployment Tax Act (FUTA) is an employer-only tax. Employees do not contribute, and it is not withheld from paychecks. You pay it separately and report it annually on Form 940.

‍How to Calculate Federal Income Tax Withholding‍

To calculate federal income tax withholding for each paycheck, you need three inputs: 

• the employee’s gross pay for the pay period

• their completed Form W-4

• the IRS withholding tables in Publication 15-T

Example: Calculating Withholding for One Employee‍

Maya earns $40,000 per year and is paid biweekly, with gross pay of $1,538.46 per paycheck. She completed her Form W-4 as single, with no dependents, and no additional withholding.

To calculate her federal income tax withholding, you use the biweekly wage bracket table in IRS Publication 15-T for a single filer. You can also use the percentage method tables, which produce the same result.

‍Calculation Walkthrough‍

Using this information:

• Gross pay: $1,538.46

• Filing status: single

• Pay frequency: biweekly

Locate the wage range in the IRS biweekly table and read the withholding amount for a single filer.

• Federal income tax withheld: $100 (2026)

This is how the manual process works or you can choose SurePayroll® By Paychex to calculate it automatically for each employee, every pay period.

The FICA Employer Match‍

The employee's paycheck shows their FICA withholding. You will deposit double. For Maya's $1,538.46 paycheck, you'll deposit $235.38: $117.69 withheld, $117.69 employer match.

Your total per-paycheck cost, gross employee wages plus the employer FICA match, is $1,656.15.

‍Additional Medicare Tax‍

For employees earning more than $200,000 in a calendar year, apply an additional 0.9% withholding. There is no employer match.

‍IRS Deposits and Deadlines‍

Once you have withheld the taxes, you deposit them to the IRS on your assigned schedule. Most new businesses deposit monthly by the 15th. Missing a deposit deadline triggers penalties, even if the withholding amount was correct.

‍Monthly vs. Semiweekly: How the IRS Assigns Your Schedule‍

The IRS assigns your deposit schedule based on your total employment tax liability during the lookback period, the 12 months ending June 30 of the prior year. 

• Monthly depositors: $50,000 or less in employment taxes during the lookback period. Deposits are due by the 15th of the following month. Many new businesses start on this schedule.

• Semiweekly depositors: Over $50,000. Deposits are due based on payroll day.

• Next-day rule: If you accumulate $100,000 or more in a single deposit period, you must deposit by the next business day, regardless of your assigned schedule.

EFTPS: Enrollment and How It Works‍

You’ll use EFTPS, the Electronic Federal Tax Payment System, a free service from the U.S. Department of Treasury, to make deposits.

‍Enroll in EFTPS before you run your first payroll. The IRS mails you a PIN to activate your account. Plan for up to five business days.

Once it arrives, you’re set to deposit.

‍The Failure-to-Deposit Penalty‍

The IRS failure-to-deposit penalty starts at 2% on the first day and increases based on how late the deposit is made.

The IRS also charges interest separately on unpaid amounts.

‍IRS data shows that in 2024, federal tax deposit penalties accounted for more than $18.9 billion in assessed penalties.

For a monthly depositor, one missed deadline triggers a penalty on the full deposit amount.

SurePayroll automates deposit scheduling, so you can stay on your assigned schedule without manual tracking.  

Reporting Payments‍

After depositing, you report withheld taxes quarterly on Form 941, Employer’s Quarterly Federal Tax Return.

Filing deadlines are April 30, July 31, October 31, and January 31.

‍Your Payroll Withholding Checklist‍

Run these four steps every pay period:

1. Use your employee's W-4 to calculate federal income tax. If you don't have a W-4 on file, the IRS requires you to withhold at the single rate with no adjustments. Get the W-4 during onboarding, so the first paycheck is accurate.

2. Calculate FICA taxes at 6.2% (Social Security) and 1.45% (Medicare). These tax rates are the same for every employee, every paycheck.

3. Deposit withheld taxes through EFTPS by your deadline. Most new businesses deposit monthly by the 15th. Mark it on your calendar.

4. File Form 941 each quarter. Due dates: April 30, July 31, October 31, January 31.

You can also run SurePayroll to handle tax calculations, EFTPS deposits, and Form 941 filing automatically. See how SurePayroll works.

What to Say When Your Employee Asks About Their Paycheck‍

Most first-time employees haven't seen their gross pay broken down into taxes before, and they may have questions. In a 2024 Tax Foundation national tax literacy poll, more than 61% of respondents could not correctly answer basic questions about income tax concepts. 

You can get ahead of questions with a brief explanation at the first payroll.

Federal income tax is based on the W-4 they filled out. That's the variable amount; it changes based on their filing status and elections. Social Security and Medicare come out at fixed rates (6.2% and 1.45%) for everyone. These amounts get credited toward their annual taxes. If they want to adjust federal income tax withholding, they update their W-4 before the next payroll.

‍The Script‍

“The difference between your gross pay and your take-home pay is taxes. Federal income tax is withheld based on the W-4 you completed. That is the largest variable because it reflects your elections. Social Security and Medicare are withheld at fixed rates of 6.2% and 1.45%. Those rates apply to every employee.

These amounts are credited toward your taxes for the year. If you want to adjust your federal income tax withholding, update your W-4 and submit it before the next payroll.”

This explanation identifies each deduction, connects federal income tax to the W-4, and provides a clear next step if your employee wants to adjust withholding. Keep a current W-4 on hand so updates can be processed before the next payroll.