What counts as a payroll tax
Payroll taxes are the taxes calculated on employee wages. They include Social Security and Medicare (together called FICA), plus federal and state unemployment taxes.
Every time you run payroll, several tax pieces are created:
- Social Security and Medicare. The employee pays one share through withholding. The employer pays a matching share on top.
- Federal unemployment (FUTA). Paid by the employer only. It funds the unemployment system.
- State unemployment (SUTA). Also generally paid by the employer, with rates that vary by state and by your claims history.
The rules and rates change, so confirm current figures with the IRS or your payroll provider rather than relying on a number you saw years ago. Our guide to how to do payroll shows the full cycle.
What counts as an income tax
Income tax is a tax on earnings or profit. For a business, it depends on how the business is structured. For employees, it is withheld from each paycheck.
Income tax shows up in two different places, and that confuses people.
First, you withhold federal income tax (and state or local income tax where it applies) from your employees' paychecks. That money belongs to the government, and you hold it temporarily. It is not an expense of the business.
Second, the business or its owner pays income tax on profit. A sole proprietor, partnership or LLC taxed as a pass-through reports profit on the owner's personal return. A C corporation pays its own corporate income tax. The structure you chose, covered in choosing a business structure, decides which applies.
Side-by-side comparison
Payroll taxes are tied to wages and paid every pay period. Income tax is tied to profit and paid quarterly or annually. The payroll portion is due whether the business made money or not.
| Feature | Payroll taxes | Income taxes |
|---|---|---|
| Based on | Wages paid | Profit or earnings |
| Who pays | Employee and employer share | Owner or corporation, plus employee withholding |
| When | Every pay period, deposited on a schedule | Quarterly estimates and annual return |
| If the business loses money | Still owed | May be reduced or zero |
| Funds | Social Security, Medicare, unemployment | General government operations |
The fourth row matters most for cash. A slow month does not shrink your payroll tax bill. It shrinks only the profit that income tax is based on.
Why payroll taxes are the dangerous ones
Withheld payroll taxes are held in trust for the government. Using them to cover other bills and falling behind can bring steep penalties and personal liability for owners.
When cash is tight, it is tempting to treat withheld taxes as a short-term loan. Do not. The IRS treats taxes withheld from employees as trust funds. Unpaid amounts can lead to penalties and, in serious cases, personal responsibility for the people who controlled the money.
Protect yourself with a few simple habits:
- Deposit payroll taxes on the schedule the IRS assigns you.
- Use a payroll service that files and deposits automatically.
- Keep payroll tax cash in a separate account so it never mixes with operating money.
- Reconcile deposits against filings each quarter.
If you have already fallen behind, talk to a tax professional promptly. Penalties usually grow with time.
Planning cash for both bills
Build both into your cash flow forecast: payroll taxes as a fixed cost of each pay cycle, income tax as a share of profit set aside regularly.
A simple method is to treat each payroll as a true cost of more than the gross wage. If an employee earns $4,000 a month, your actual cost is higher once the employer's share of payroll taxes and benefits is added. Ask your payroll provider for your fully loaded figure.
For income tax, move a set percentage of profit into a tax savings account every month or quarter. Your accountant can suggest the right percentage. Quarterly estimates are covered in 5 tips for filing quarterly taxes.
Then put both on a forecast. Our guide to cash flow forecasting explains how to see weeks where payroll and a tax deposit land together.
When funding covers a payroll or tax gap
Short-term working capital can bridge a timing gap between a payroll or tax date and customer payments, as long as the business can repay it from normal revenue.
Say a seasonal business expects $90,000 of receivables in 45 days but has payroll and a tax deposit due in 10. A short-term bridge can keep both on time. In this illustrative case, paying a few thousand dollars in financing cost is usually cheaper than IRS penalties and late-pay damage to staff trust.
Funding is not a fix for a business that loses money every month. It works when the timing gap is temporary and repayment is clear. See payroll loans for the options, and working capital through ROI Funder, which considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue.
Always confirm tax questions with your accountant. This article is general information, not tax advice.
Frequently asked questions
Do I pay payroll taxes if my business has no profit?
Yes. Payroll taxes are based on wages, not profit, so they are owed even when the business loses money.
Is the income tax I withhold from employees my expense?
No. It is the employee's tax, held by you until you deposit it. The employer share of Social Security and Medicare is a business expense.
Do sole proprietors pay payroll taxes on themselves?
Generally owners of sole proprietorships pay self-employment tax rather than payroll tax on their own earnings. They owe payroll taxes on any employees. Ask your accountant about your structure.
How often are payroll taxes due?
The IRS assigns a deposit schedule, usually monthly or semiweekly, based on your tax history. Your payroll provider can tell you which one applies.