When you run payroll, you withhold taxes from employees' pay and owe your own employer share of some taxes. Those amounts do not wait until the end of the year: they must be deposited with the government on a schedule. Missing deposits is one of the most expensive mistakes a new employer can make.

What is deposited

The IRS explains on its page about depositing and reporting employment taxes that, in general, you must deposit federal income tax and Additional Medicare tax withheld, as well as both the employer and employee Social Security and Medicare taxes. Federal unemployment tax has its own rules. State payroll taxes are separate and set by each state.

Deposit schedules

The IRS states that there are two deposit schedules, monthly and semiweekly, and that before the beginning of each calendar year you must determine which one applies to you. The schedule is based on the amount of tax you reported in a past lookback period, not on how often you pay employees. Publication 15, Employer's Tax Guide, explains how the lookback period works and the special rules that can apply, such as when a large liability builds up quickly.

How deposits are made

Federal tax deposits are generally made electronically. Publication 15 and the IRS deposit page explain the options. Set up the payment method before your first payroll so the first deposit is not late.

Deposits and quarterly returns

Most employers report wages and taxes on a quarterly federal return. The deposits you made during the quarter should match the liability on that return. If they do not, the difference needs to be explained or paid. Reconciling deposits to payroll registers each quarter catches errors early.

Records to keep

  • Payroll registers for each pay run
  • Deposit confirmations
  • Quarterly and annual payroll returns
  • Employee withholding forms

The IRS overview of understanding employment taxes summarises the main obligations, and our own guide to understanding employment taxes explains them in plain English.

Bookkeeping for payroll taxes

  • Record withheld taxes and employer taxes as liabilities when payroll runs
  • Record each deposit as a payment that reduces the liability, not as a new expense
  • Check that payroll liability accounts return to near zero after deposits

A payroll liability balance that keeps growing is a warning sign that deposits are being recorded incorrectly, or not being made.

Key terms

  • Withholding: income tax and employee Social Security and Medicare taxes held back from employees' pay.
  • Employer share: the employer's own portion of Social Security and Medicare taxes.
  • Lookback period: the past period the IRS uses to decide whether you follow the monthly or semiweekly deposit schedule.
  • Payroll register: a report of each pay run showing gross pay, deductions, taxes and net pay.
  • Payroll liability: the balance owed for withheld and employer taxes that have not yet been deposited.

Put every deposit date in your calendar for the year as soon as your schedule is known.

How we help

Our payroll services include running pay, tracking deposit schedules and reconciling deposits to returns. If you are deciding whether a worker should be on payroll at all, see employee or independent contractor.