There are two categories of payroll taxes to understand as an employer. Taxes you pay out of your own pocket, and taxes you withhold from employee paychecks and send to the government on their behalf. Both are your responsibility to handle correctly, but only one of them actually adds to your labor costs.

Your share of FICA is the biggest employer-paid tax. You pay 6.2% of each employee’s wages toward Social Security, up to $168,600 in 2024. You also pay 1.45% toward Medicare on all wages with no cap. Together that’s 7.65% on top of what you’re already paying the employee in wages.

Federal Unemployment Tax (FUTA) is technically 6% on the first $7,000 of wages per employee per year. In practice, you receive a credit for paying state unemployment tax that brings the effective rate down to 0.6%, or roughly $42 per employee annually. Tennessee unemployment tax (SUTA) rates vary based on your industry and claims history. New employers receive an assigned rate that adjusts over time depending on how many former employees file claims against your account. The wage base and rates change each year, so check with the Tennessee Department of Labor for current numbers.

On the withholding side, you deduct federal income tax from each employee’s paycheck based on their W-4 form. The W-4 and IRS withholding tables determine the amount, not you. Employees also pay their own share of FICA at the same rates you pay, meaning 6.2% for Social Security and 1.45% for Medicare withheld from every paycheck. For employees earning over $200,000, you withhold an additional 0.9% Medicare tax that falls entirely on the employee.

One real advantage of operating in Tennessee is that there’s no state income tax on wages. You don’t need to worry about state income tax withholding, which removes an entire layer of compliance that employers in most other states deal with. That said, if you have employees working in other states, you may still have withholding obligations in those states.

In practical terms, every dollar of wages costs you roughly $1.08 to $1.10 once you add your share of FICA and unemployment taxes. A $50,000 salary really costs closer to $54,000 before benefits, workers’ comp, or anything else. Understanding this true cost matters when you’re budgeting for new hires or evaluating whether to bring on employees versus contractors. Solid small business bookkeeping helps you track these costs so they don’t surprise you at the end of the quarter.

You’re responsible for depositing withheld taxes and your employer share on schedule. Federal payroll tax deposits are due either semi-weekly or monthly depending on your total tax liability. Late deposits trigger penalties that compound fast. You also file Form 941 quarterly to report wages paid and taxes withheld, and you issue W-2s to every employee at year end.

The withholding piece is where many business owners get into serious trouble. The money you withhold from employee paychecks is not yours. The IRS treats it as money held in trust for the government. If you fail to deposit it on time or use it for other business expenses, the IRS can hold you personally liable through something called the Trust Fund Recovery Penalty. This applies even if your business is structured as an LLC or corporation. Personal liability for payroll taxes is one of the few areas where your business structure won’t protect you.

The rules aren’t complicated individually, but keeping track of deposit schedules, rate changes, and quarterly filings adds up. Most small business owners find that outsourcing payroll costs less than the time and risk of handling it themselves, especially once you factor in the penalties for getting it wrong.