10 Things To Know About Your Paycheck And Payroll Taxes
It’s National Payroll Week, and the IRS is using the occasion to remind workers and employers about what goes into getting payroll right.
National Payroll Week, founded in 1996 by PayrollOrg, recognizes the payroll professionals who make sure workers get paid accurately and on time. It’s a great time to take a closer look at what’s going on between your gross pay (what you earn) and the amount that actually lands in your bank account.
Here are 10 things to know about payroll—and a bonus reason to look at your pay stub.
1. Your Employer Doesn’t Decide How Much Federal Income Tax You Owe
Your employer withholds federal income tax from your paycheck, but it doesn’t determine your tax bill.
In the U.S., federal income tax is pay-as-you-go. For employees, that means money is withheld throughout the year and credited against the federal income tax you calculate when you file your return. If too little is withheld, you will generally owe tax when you file your tax return. If too much is withheld, you will generally be entitled to a refund.
How much gets withheld from your paycheck largely depends on the information you provide on Form W-4, Employee’s Withholding Certificate. The form takes into account your filing status, multiple jobs, dependents and credits, other income, deductions, and any additional amount you want withheld. That’s why filling out Form W-4 accurately matters from the beginning.
2. Payroll Taxes Aren’t All The Same Thing
We tend to use “payroll taxes” as a catch-all, but several different federal taxes may come out of your paycheck.
Federal income tax withholding is what we tend to think of the most. But Social Security and Medicare taxes—FICA taxes—also take a bite.
For employees, employers generally withhold your share of Social Security and Medicare taxes from wages and pay a share of those taxes, too. But your employer doesn’t match your federal income tax withholding. That money is simply withheld from your wages and applied toward your individual federal income tax liability.
3. Social Security Taxes Aren’t Unlimited
Social Security tax doesn’t apply to unlimited wages. Each year, there is a Social Security wage base that caps the amount of earnings subject to the tax. For 2026, the Social Security tax applies only to the first $184,500 of wages.
Medicare tax works differently: there is no wage cap. Higher earners may also be subject to the Additional Medicare Tax. For payroll purposes, employers begin withholding the additional 0.9% once an employee’s wages exceed $200,000 for the year.
You can find out more, including Social Security taxes for the self-employed and how benefits are calculated, here.
4. Payroll Can Only Work With The Information You Give It
Your employer knows how much it pays you, but it generally doesn’t know the rest of your financial life. Your employer may not know that your spouse works, that you have a second job, that you earn money from a side business, or that you expect significant investment income.
Your employer calculates federal income tax withholding using the information available to it, including what you report on Form W-4. Importantly, you give Form W-4 to your employer—you don’t file it with the IRS.
And what was accurate when you filled out the form may not stay that way. Starting or leaving a job, getting married or divorced, having or adopting a child, working multiple jobs, or experiencing a significant change in income can all be reasons to take another look at your withholding. Changes in tax law can matter, too.
If you have any big changes, it’s helpful to revisit your Form W-4 and make any necessary changes. The IRS Tax Withholding Estimator can help you determine whether you’re having too much or too little federal income tax withheld.
5. Calling Someone An Independent Contractor Doesn’t Make Them One
Businesses generally don’t withhold federal income tax, Social Security tax, or Medicare tax from payments to independent contractors, nor do they pay an employer share of Social Security and Medicare taxes for those workers. But you can’t avoid those obligations simply by calling someone an independent contractor—or even by having the worker sign an agreement saying that they are one.
For federal employment tax purposes, the facts and circumstances of the relationship matter. The IRS generally looks at evidence in three broad categories: behavioral control, financial control, and the type of relationship between the parties.
There isn’t a single factor—or a magic number of factors—that determines the answer. As a rule of thumb, however, the more control a business has over what you do and how the work is performed, the more likely it is that you are an employee.
6. Getting Worker Classification Wrong Can Be Expensive
If a business treats you as an independent contractor when you should have been classified as an employee, the consequences can extend well beyond simply issuing the wrong tax form. The business may be responsible for employment taxes that should have been withheld or paid. Depending on the circumstances, misclassification can also create issues involving benefits, unemployment, wage-and-hour laws, and state taxes and employment laws.
Businesses that are unsure about a worker’s status can ask the IRS to decide by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. (As a worker, you can do the same.) But the IRS won’t take one party’s word for it. Since both parties may be affected by a determination of employment status, the IRS attempts to obtain information from all parties involved by sending them blank Forms SS-8 to complete.
If a determination is unfavorable to the business, certain provisions may help. Section 530 relief can protect qualifying businesses from certain federal employment tax liabilities, while the IRS Voluntary Classification Settlement Program, or VCSP, allows eligible employers to prospectively reclassify workers as employees with partial relief from federal employment taxes.
7. Some Payroll Taxes Are Held In Trust
When an employer withholds federal income tax and the employee’s share of Social Security and Medicare taxes from a worker’s paycheck, that money is referred to as trust fund taxes. That’s because the money doesn’t belong to the employer; they’re simply holding the money in trust until it is deposited with the U.S. Treasury.
That distinction becomes especially important when a business is having cash-flow problems. Money withheld from employees isn’t simply another source of operating cash that an employer can borrow to pay the rent or keep vendors happy. And failing to pay those taxes can have personal consequences.
The IRS can assess the Trust Fund Recovery Penalty against a person who is responsible for collecting, accounting for, or paying over trust fund taxes and willfully fails to do so. The penalty equals the unpaid balance of the trust fund tax and may be collected from the responsible person’s personal assets.
I know what you’re thinking: a business is supposed to be separate from personal assets. But incorporating a business doesn’t necessarily shield the people responsible for payroll taxes when those taxes aren’t paid.
8. Filing A Payroll Tax Return And Depositing Payroll Taxes Are Two Different Things
Typically, employers use Form 941, Employer’s Quarterly Federal Tax Return, to report wages and federal income, Social Security, and Medicare taxes each quarter. But filing the return is only part of the job.
Federal tax deposits generally must be made electronically according to an applicable deposit schedule. For most Form 941 filers, that will be a monthly or semiweekly schedule based on employment tax liability during a look-back period. That means employers have to be on top of things. An employer can file an employment tax return on time and still have a problem because the required deposits were late—and making deposits doesn’t eliminate the obligation to file the required return.
The IRS currently offers several electronic payment options for businesses, including the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, and the Business Tax Account for eligible users. I also highly recommend using a payroll tax company, even for (or maybe especially for) small businesses. They cost less than you think.
9. Payroll Information Is Valuable To Thieves, Too
Payroll systems don’t just move money. They also contain a lot of sensitive information about workers and their finances, making them attractive targets for thieves.
During National Payroll Week, the IRS reminds employers and payroll professionals to verify changes to direct deposit or employee information through a trusted channel, limit access to payroll systems, use multi-factor authentication, and remain alert to phishing and credential theft.
It’s also a good idea for employers and employees to stay up to date on common identity theft and phishing scams. A common ploy, for example, is a fraudulent request to change an employee’s direct deposit information. A request that appears to come from an employee could actually come from a thief trying to redirect the employee’s paycheck. Once a paycheck has been redirected to a thief’s account, getting the money back can be much more difficult.
10. Keep Great Records
If you’ve been reading Taxgirl for a while, you probably knew this one was coming.
The IRS says employers should generally keep employment tax records for at least four years. That includes more than copies of filed tax returns. Depending on the record, employers may need to retain information about employees and wages, Forms W-4, tax deposits, and other payroll-related information.
Workers should keep payroll records, too. Pay stubs can help you confirm that your W-2 is correct, document income and withholding, and help answer questions that might come up later. They can also be valuable when other tax documents have been lost or destroyed. (As I’ve noted before, some records can be reconstructed when they’re missing.)
Bonus: Your Paycheck Shows More Than What You Earned
When was the last time you actually looked at your pay stub? (Mea culpa: I rarely do.)
The salary or hourly wage you agreed to isn’t necessarily the number you’ll see everywhere on your pay stub or, eventually, on your Form W-2. Depending on your circumstances, your pay stub may show gross pay, federal taxable wages, Social Security wages, Medicare wages, pre-tax deductions, after-tax deductions, federal income tax withholding, Social Security and Medicare taxes, and net pay. And those numbers don’t always match.
Certain employee benefit contributions, such as pre-tax contributions to a traditional 401(k), may reduce wages for federal income tax purposes while receiving different treatment for Social Security or Medicare tax purposes. That’s one reason the wage amounts reported in Boxes 1, 3, and 5 of Form W-2 aren’t necessarily identical.
If you participate in employer-sponsored benefit programs, like health coverage or retirement savings, you’ll typically see those show up as payroll deductions. And if you’re subject to any wage garnishments, like court-ordered child support or an IRS tax levy, you’ll see that on your check, too.
It’s worth checking your bottom line from time to time, just to make sure everything looks right. And if it doesn’t? Be sure to ask questions. It’s a lot easier to correct a problem when you spot it early.
