Yes. Employers in the United States are required to take out federal taxes from employee paychecks. Under 26 U.S.C. § 3402, you must deduct federal income tax from every employee’s wages and send it to the U.S. Treasury, and you must also withhold the two FICA taxes: Social Security and Medicare.1Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source The obligation starts with the first paycheck and runs through every pay period after it. Skipping withholding is not an option the law leaves open to you, and the penalties for trying reach into personal assets.
What You Have to Withhold
Three federal payroll taxes come out of employee pay: federal income tax, Social Security tax, and Medicare tax.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Income tax withholding varies by employee based on what they put on Form W-4. FICA is flat-rate and identical for everyone.
You do more than just collect FICA. You match the employee’s Social Security and Medicare contributions dollar for dollar from your own funds, which doubles what actually reaches the Treasury.
There is a fourth federal payroll tax, the Federal Unemployment Tax (FUTA), but it is not withheld from wages. You pay FUTA entirely yourself. The gross rate is 6.0% on the first $7,000 of each employee’s annual wages, and the credit for paying state unemployment tax generally drops the effective rate to 0.6%, or roughly $42 per employee per year.3Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return Employers in states with outstanding federal unemployment loans may see a reduced credit and a higher effective rate.
Only Employees, Not Contractors
Withholding applies to employees. If you hire an independent contractor, you generally don’t withhold federal taxes from their pay; contractors settle up with the IRS on their own.
The line between employee and contractor matters because getting it wrong is expensive. The IRS looks at three areas: behavioral control (do you direct how the work gets done?), financial control (do you control equipment, expenses, and the business side of the arrangement?), and the relationship itself (written contract, benefits, expectation of permanence).4Internal Revenue Service. Employee (Common-Law Employee) No single factor decides it. Everything gets weighed together.
If you treat someone as a contractor when they should have been an employee, you owe the taxes you should have withheld. Even where you had a reasonable basis for the classification, Section 3509 imposes reduced penalty rates of 1.5% of wages for the income tax portion and 20% of the employee’s FICA share, and those rates double if you also failed to file the required information returns.5Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes If you’re uncertain about a worker, either party can file Form SS-8 and ask the IRS to make the call.6Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
How Much Income Tax to Withhold
The number comes from Form W-4 and the withholding tables in IRS Publication 15-T. Every new hire fills out a W-4 with their filing status, information about second jobs, expected credits and deductions, and any extra flat amount they want withheld each pay period.7Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate You plug that data into the Publication 15-T tables to figure the deduction each pay period.8Internal Revenue Service. Publication 15-T Federal Income Tax Withholding Methods If an employee gives you an updated W-4, you have to put the change into effect.
Exempt Employees
An employee can claim exemption from income tax withholding on the W-4 if they had zero federal income tax liability last year and expect none this year.9Internal Revenue Service. Form W-4, Employees Withholding Certificate That usually means low earners or students under the filing threshold. The exemption covers income tax only. You still withhold FICA. It also expires annually, so an exempt employee must give you a new W-4 by February 16 of the following year to keep it going.
IRS Lock-In Letters
If the IRS decides an employee isn’t having enough withheld, it sends you a lock-in letter setting a minimum withholding level. Once the letter takes effect (at least 60 days after its date), you can’t withhold less than the specified amount unless the IRS says so.10Internal Revenue Service. Withholding Compliance Questions and Answers A newer W-4 from the employee only overrides the letter if it results in more withholding, not less. Ignore a lock-in letter and you become personally liable for the shortfall.
FICA Rates and Caps
Social Security tax is 6.2% of the employee’s gross wages, matched by another 6.2% from you, for a combined 12.4%.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates It applies up to an annual wage cap. For 2026 that cap is $184,500.11Social Security Administration. Contribution and Benefit Base Once an employee’s year-to-date wages pass it, you stop withholding Social Security tax on their remaining paychecks. An employee earning at or above $184,500 in 2026 contributes $11,439, and you match that.
Medicare tax is 1.45% of all wages with no cap, matched by another 1.45% from you. On wages above $200,000 in a calendar year, you also withhold an Additional Medicare Tax of 0.9%, based only on that $200,000 threshold regardless of the employee’s filing status. You do not match the additional 0.9%.12Social Security Administration. Social Security and Medicare Tax Rates
Depositing What You Withhold
Collecting the money is only half the obligation. You have to deposit the withheld income tax, the employee’s FICA share, and your employer FICA match with the Treasury on a fixed schedule, and all federal tax deposits have to be made electronically.13Internal Revenue Service. Depositing and Reporting Employment Taxes Most employers use the Electronic Federal Tax Payment System (EFTPS), which the Treasury runs for free.14Internal Revenue Service. EFTPS – The Electronic Federal Tax Payment System
Your deposit frequency depends on how much employment tax you reported during a lookback period. If your lookback total was $50,000 or less, deposits are monthly, due by the 15th of the month after wages were paid. If it was more than $50,000, you’re on a semiweekly schedule with tighter windows.15Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
What Happens If You Don’t
Late Deposit Penalties
The failure-to-deposit penalty climbs quickly with the days you’re behind:
- 1 to 5 days late: 2% of the undeposited amount
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- Still unpaid 10 days after the first IRS notice: 15%
A separate 10% penalty hits if you were required to deposit electronically and didn’t.16Internal Revenue Service. 20.1.4 Failure to Deposit Penalty
Failure to File or Pay
Not filing your quarterly return on time costs 5% of the unpaid tax per month or partial month late, capped at 25%. Filing on time but not paying in full costs 0.5% per month, also capped at 25%.17Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax Filing on time when you can’t pay in full is always the better move.
The Trust Fund Recovery Penalty
The withheld income tax and the employee’s share of FICA are called “trust fund” taxes because that money belongs to the employee and the government from the moment it leaves the paycheck. It isn’t the employer’s to spend. When a business collects those taxes and doesn’t hand them over, the IRS treats it as a breach of trust rather than a routine late payment.18Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty
Under 26 U.S.C. § 6672, any person who was responsible for collecting and paying over these taxes and willfully failed to do so can be held personally liable for a penalty equal to 100% of the unpaid trust fund taxes.19Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax “Responsible person” is read broadly and reaches owners, officers, bookkeepers, and anyone with authority to decide which bills the company pays. The IRS can file federal tax liens and levy personal bank accounts to collect. At that point the payroll tax problem stops being a business issue and becomes a personal one.
State Withholding Is a Separate Question
Federal withholding is only part of what you owe. Most states also require you to withhold state income tax from wages, though roughly eight states have no individual income tax and therefore no state withholding. Every state also runs its own unemployment insurance tax with its own taxable wage base. Those obligations sit alongside the federal ones and have their own deadlines, deposit rules, and penalties.