How to manage payroll taxes for your crew
Payroll tax is the tax you withhold from your crew's paychecks plus the tax you pay on top of their wages, sent to the IRS and your state on a schedule. For 2026, you withhold federal income tax, 6.2% for Social Security and 1.45% for Medicare from each W-2 employee's pay, match the Social Security and Medicare out of your own pocket, and pay federal and state unemployment tax. Only your share is payroll tax expense. The withheld part is your techs' money that you're holding for the government.
This post covers W-2 employees. The contractor payroll compliance post covers paying 1099 subs, and employee versus subcontractor classification covers who counts as which.
What is payroll tax and how does it work?
Every paycheck splits into what the tech takes home and what goes to the government. Here's who pays what in 2026, from IRS Publication 15:
| Tax | Withheld from the tech | Paid by you |
|---|---|---|
| Federal income tax | Based on the tech's W-4 | None |
| Social Security | 6.2% | 6.2% |
| Medicare | 1.45% | 1.45% |
| Federal unemployment (FUTA) | None | 0.6% of the first $7,000, with the full state credit |
| State unemployment (SUTA) | Depends on the state | The rate your state assigns |
| State income tax | Where your state has one | None |
Social Security stops once someone's 2026 wages pass $184,500, which few techs reach. Medicare has no cap, and you also withhold the Additional Medicare Tax, 0.9% on wages over $200,000, from the employee only. FUTA is 6.0% on the first $7,000 of each employee's wages, less a credit of up to 5.4% for state unemployment tax. In a credit reduction state the credit is smaller, so FUTA costs more there. State unemployment also stops at a yearly wage base your state sets.
How to calculate payroll tax expense
Add up your share only: the employer half of Social Security and Medicare, plus federal and state unemployment. Here's January for an example crew of five techs who each earned $6,000, or $30,000 in all:
| Line | Withheld from the techs | Your share |
|---|---|---|
| Social Security, 6.2% | $1,860 | $1,860 |
| Medicare, 1.45% | $435 | $435 |
| Federal income tax (example) | $2,400 | None |
| FUTA, 0.6% after the state credit (all under the $7,000 cap) | None | $180 |
| State unemployment (example, 2.7%) | None | $810 |
| Total | $4,695 | $3,285 |
Your payroll tax expense for the month is the right column: $3,285, or about 11% on top of wages. The left column came out of the techs' pay. It sits on your balance sheet as a liability until you deposit it. The federal deposit for January is $6,990, both halves of Social Security and Medicare plus the income tax you withheld.
In the books, that payroll posts like this:
| Account | Debit | Credit |
|---|---|---|
| Field wages (cost of goods sold) | $30,000 | |
| Field payroll taxes (cost of goods sold) | $3,285 | |
| Cash, the techs' net pay | $25,305 | |
| Payroll liabilities, until deposited | $7,980 |
The techs' payroll taxes go in cost of goods sold next to their wages, since they exist only because the techs are on your payroll. Office staff's go in overhead. Labor burden adds workers' comp, benefits and paid time off to get a tech's full cost.
January costs the most. Once each tech passes the FUTA and state wage caps, those lines drop to zero, and by fall your share is mostly Social Security and Medicare. A landscaping company that brings its crew back each spring pays most of its unemployment tax in the first months of each season instead.
When are payroll taxes due?
The IRS assigns your federal deposit schedule from the taxes you reported over a four-quarter lookback period. Every federal deposit goes in electronically, through EFTPS or your payroll provider.
| What | How often | The rule |
|---|---|---|
| Federal deposits: withheld income tax plus both halves of Social Security and Medicare | Monthly or semiweekly | Monthly if you reported $50,000 or less in the lookback period, semiweekly if more. New employers are monthly for their first calendar year. |
| A very large payroll day | Next business day | Owe $100,000 or more on any day and it's due the next business day |
| Form 941 | Quarterly | Due April 30, July 31, October 31 and January 31, or the next business day when that's a weekend |
| FUTA and Form 940 | Figured quarterly, filed yearly | Deposit once your undeposited FUTA passes the threshold in Publication 15 |
| State unemployment and withholding | Usually quarterly | Set by your state |
| W-2s | Every January | To each employee and the Social Security Administration |
Late deposits draw penalties that grow the longer they stay late, so put the dates on one calendar and give each one an owner.
Keep the tax money out of reach
The withheld part is what gets owners in trouble, because it sits in the operating account looking like cash. If it isn't deposited, the IRS can assess the trust fund recovery penalty personally against the people who were responsible for paying it and acted willfully in not doing so.
Brandon Vaughn, who coaches home service owners, learned to watch the payroll account the hard way:
All this was born out of the fact that I hired a general manager and an operations manager, and I let them have way too much freedom responsibility… And then all of a sudden, like we were broke and we didn't have any money in our payroll bank account because I didn't watch things closely enough. And I didn't have them report to me what they needed to be reporting.
He'd taken most of a summer off with his kids, and the first sign of trouble was an empty payroll account. Three habits keep that from happening to you:
- Run payroll from its own bank account. If a service like Gusto or ADP deposits your taxes, it pulls them with each payroll. If you deposit them yourself, move them the day you run payroll.
- Get the payroll summary from whoever runs payroll, every run: gross pay, taxes withheld, your share and net pay.
- Watch payroll liabilities on the balance sheet. After each deposit, the line should fall back toward zero. If it keeps growing, a deposit didn't happen.
Run it yourself or use a payroll service?
Use a service that deposits and files for you, and have someone who knows your books check it. When one owner told Brandon he was handing his payroll taxes to his payroll company, Brandon backed him with a rule of thumb:
Anything that you can farm out for less than what your wage and benefit is is a slam dunk win.
A payroll service calculates, deposits and files. It doesn't know which wages belong in cost of goods sold or notice a raise keyed in wrong, so someone still reads the summary. Payroll service versus in-house compares the two. On plans that include payroll, YetiBooks runs it in the same firm as your books, so the taxes land on the right lines every month (how it works). If you're not sure yours do, bring a recent payroll summary and your P&L to a free profit call.
Questions owners ask
What is payroll reporting? The returns that tell the government what you paid and withheld: Form 941 each quarter, Form 940 each year, your state's unemployment and withholding returns, and W-2s every January. Inside the shop, it's also the payroll summary you read each run to see what labor cost.
Are payroll taxes deductible? Your share is. IRS Publication 334 says you can deduct the Social Security, Medicare and FUTA taxes you paid out of your own funds as an employer, and state unemployment contributions count as taxes where state law treats them that way. What you withheld from your techs is already part of the wages you deduct.
Do I pay payroll taxes on 1099 subs? Generally no. The IRS says you don't have to withhold or pay any taxes on payments to independent contractors; they pay 15.3% self-employment tax themselves. That's why the label has to be right. When an owner had to move subs who worked like employees onto W-2, Brandon gave him the words for it:
The reality is that you're behaving like employees, you're acting like employees. As far as the government's concerned, you really should be treated as employees. Good news, bad news situation. Good news is that we're going to be actually paying some of the taxes that you're supposed to be paying right now.
What does the 2026 overtime deduction change? Techs who are owed overtime under the federal Fair Labor Standards Act can deduct the extra half of time-and-a-half on their own returns, up to $12,500 a year ($25,000 on a joint return), for 2025 through 2028. The deduction phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers), and overtime paid beyond what that law requires doesn't count. The IRS requires employers to report qualified overtime on the information returns they give employees, so your payroll system has to track it separately.
