How Payroll Taxes Actually Work for a First-Time Founder
A plain-English walkthrough of how payroll taxes work once you hire your first employee, including FICA, FUTA, SUTA, and Form 941 deadlines.
By Initio Editorial Team · · 5 min read
The short answer
Payroll taxes include federal and state income tax withholding plus FICA (6.2% Social Security up to the wage base and 1.45% Medicare) matched by the employer, and unemployment taxes (FUTA/SUTA). You must deposit withheld amounts on a schedule, file Form 941 quarterly, and send W-2s by January 31. Missing deposits triggers steep IRS penalties.
Key takeaways
- Employers withhold and also match 6.2% Social Security (up to the annual wage base) and 1.45% Medicare, plus an extra 0.9% Additional Medicare withholding above $200,000 in wages.
- FUTA (federal unemployment) is 6.0% on the first $7,000 of wages per employee, usually reduced to an effective 0.6% with the full state credit.
- Form 941 is filed quarterly to reconcile withheld and deposited payroll taxes; Form 940 is filed annually for FUTA.
- Deposit timing (monthly vs. semi-weekly) depends on your lookback period tax liability, not your pay schedule.
- Most founders use a payroll provider (Gusto, Rippling, etc.) rather than filing manually, since missed deposits carry penalties up to 15% of the unpaid amount.
The first time you run payroll as a founder, it can feel like there's a hidden layer of tax obligations nobody explained to you in school. Payroll taxes are straightforward once you see the full picture, but getting them wrong — especially missing a deposit deadline — comes with real penalties. Here's how the system actually works.
What counts as a payroll tax?
When you pay an employee (including yourself, if you're a W-2 employee of your own C-Corp), several distinct taxes are involved:
- Federal income tax withholding — based on the employee's Form W-4 elections, sent to the IRS on the employee's behalf.
- FICA (Federal Insurance Contributions Act) — Social Security and Medicare, split between employee and employer.
- State income tax withholding — if your state has one.
- FUTA (Federal Unemployment Tax Act) — paid entirely by the employer.
- SUTA (State Unemployment Tax Act) — paid by the employer, with a rate that varies by state and your claims history.
Only the first three show up on an employee's pay stub as withholding; FUTA and SUTA are employer-only costs that don't reduce the employee's paycheck. Together, these amounts determine both what your employee takes home and what your company actually spends per hire — a number many first-time founders underestimate when budgeting.
How much is FICA, exactly?
For 2025, the Social Security portion of FICA is 6.2% on wages up to the annual wage base of $176,100, paid by the employee and matched 6.2% by the employer (12.4% total). Medicare is 1.45% on all wages with no cap, also matched by the employer (2.9% total). Once an employee's wages exceed $200,000 in a calendar year, the employer must withhold an Additional Medicare Tax of 0.9% on the excess — but this extra amount is not matched by the employer. These thresholds are adjusted most years, so confirm the current wage base before running payroll in a new calendar year.
In practice, this means a $100,000 salary costs the employer roughly $107,650 once you add the employer's half of FICA alone, before accounting for unemployment taxes, benefits, or payroll provider fees.
What is FUTA and how is it calculated?
FUTA funds federal unemployment insurance and is paid solely by the employer. The statutory rate is 6.0% on the first $7,000 of each employee's wages per year, but employers who pay their state unemployment taxes on time and in full generally receive a credit of up to 5.4%, bringing the effective FUTA rate down to 0.6% (a maximum of $42 per employee per year). FUTA is reported annually on Form 940, due January 31 of the following year.
What is SUTA?
State unemployment tax is set by each state, with a rate that depends on your industry, how long you've been an employer, and your history of unemployment claims (your "experience rating"). New employers usually start at a standard new-employer rate until they build their own claims history, which can take a few years. SUTA wage bases vary significantly by state — some are as low as $7,000 and others exceed $50,000 — so check your specific state workforce agency for the current figure before budgeting employer costs.
How often do I have to deposit withheld payroll taxes?
This trips up a lot of first-time founders: deposit frequency is based on your historical tax liability, not your pay schedule. The IRS assigns you to one of two deposit schedules each year based on a "lookback period" (generally the four quarters ending the prior June 30):
- Monthly depositors: total employment tax liability of $50,000 or less during the lookback period. Deposits are due by the 15th of the following month.
- Semi-weekly depositors: liability over $50,000 during the lookback period. Deposits are due either the following Wednesday or Friday, depending on your pay date.
New employers start as monthly depositors by default. There's also a "next-day deposit rule" if your accumulated liability hits $100,000 in a single day, which can apply quickly once you have a handful of employees on a biweekly payroll. All federal deposits are made electronically through the Electronic Federal Tax Payment System (EFTPS) — there's no option to mail a check.
What tax forms does a founder need to file?
| Form | Purpose | Frequency | Due Date |
|---|---|---|---|
| Form 941 | Reconcile federal income tax, Social Security, and Medicare withheld/deposited | Quarterly | Last day of the month following quarter end |
| Form 940 | Report and pay FUTA | Annually | January 31 |
| W-2 | Report employee wages and withholding | Annually | January 31 (to employee and SSA) |
| 1099-NEC | Report payments to non-employee contractors of $600+ | Annually | January 31 |
| State equivalents | SUTA returns, state withholding reconciliations | Varies by state | Varies by state |
Some very small employers with annual payroll tax liability under $1,000 may qualify to file Form 944 annually instead of Form 941 quarterly, but most startups growing headcount quickly will stay on the quarterly schedule.
Do founders have to run payroll for themselves?
If your company is a C-Corp and you do active work for it, yes — the IRS expects you to pay yourself a "reasonable salary" through payroll rather than just taking distributions, and that salary is subject to the same FICA withholding as any other employee. LLC owners taxed as partnerships typically take draws instead and pay self-employment tax (effectively both halves of FICA, 15.3% combined) on their share of profits via their personal return rather than through payroll. The right approach depends heavily on your entity type — see our comparison of LLC vs C-Corp structures and our guide to paying yourself as a founder for more detail on setting a defensible salary.
What happens if you miss a payroll tax deposit?
The IRS penalty structure for late federal tax deposits is steep and scales with how late you are: 2% if 1–5 days late, 5% if 6–15 days late, 10% if more than 15 days late, and 15% if the IRS has to send a notice demanding payment and you still haven't paid within 10 days of that notice. These penalties apply to the deposit amount itself, separate from any interest owed, which is why most founders use a payroll provider that automates calculation and deposit timing rather than handling it manually in a spreadsheet. The IRS can also pursue the Trust Fund Recovery Penalty personally against responsible individuals (often the founder-CEO) for willfully unpaid withheld taxes, which is one of the few liabilities that can pierce the corporate veil.
Setting up payroll for the first time
Before your first pay run, you'll need a federal EIN, state withholding and unemployment tax accounts, completed W-4 and I-9 forms from each employee, and a payroll system or provider connected to your business bank account. Keeping payroll funds in a clearly separated operating account — rather than commingled with general operating cash — makes it much easier to track upcoming tax liabilities and avoid accidentally spending money you owe the IRS; a dedicated platform like Initio Treasury can help founders keep that separation clear as headcount and payroll complexity grow. Pairing payroll cadence with your broader quarterly estimated tax planning also helps avoid cash crunches around filing deadlines.
Step-by-step: running payroll correctly for the first time
Below is the basic sequence most first-time founders follow when setting up payroll for the first time, from registration through your first filings.
Frequently asked questions
Do single-member LLCs need to run payroll?
Not for the owner by default — a disregarded single-member LLC owner takes draws and pays self-employment tax, not payroll taxes. If the LLC elects S-Corp status or has W-2 employees, payroll applies to those wages.
What's the difference between FUTA and SUTA?
FUTA is a federal unemployment tax paid only by employers at an effective rate of about 0.6% on the first $7,000 of wages after the state credit; SUTA is the state-level equivalent with its own rate and wage base that varies significantly by state.
When are W-2s due?
W-2s must be furnished to employees and filed with the Social Security Administration by January 31 of the year following the tax year, with no automatic extension for the SSA copy.
What's the 2025 Social Security wage base?
$176,100. Wages above that amount are not subject to the 6.2% Social Security portion of FICA, though the 1.45% Medicare portion continues uncapped.
Should I use a payroll provider instead of doing it myself?
Most founders should. Providers like Gusto, Rippling, or Justworks calculate withholding, manage deposit schedules, and file Forms 941/940 automatically, which reduces the risk of costly late-deposit penalties.
