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Payroll Taxes Explained

Payroll taxes —
every acronym decoded, every deadline explained.

FICA, FUTA, SUTA, SDI, withholding — payroll taxes are a maze of acronyms that nobody explains clearly. This guide breaks down every tax, who pays it, what it costs, and exactly when it's due.

15.3%Self-employment tax rate
7.65%Employer FICA per employee
0.6%Effective FUTA rate
QuarterlyMost payroll return frequency
Two completely different situations: If you're self-employed with no employees, you pay self-employment tax (SE tax) on your profits. If you have employees, you also become responsible for withholding and remitting payroll taxes on their behalf — plus additional employer-only taxes.

Every payroll tax — who pays what

Social Security tax — employee shareEmployee pays6.2%
Social Security tax — employer shareEmployer pays6.2%
Medicare tax — employee shareEmployee pays1.45%
Medicare tax — employer shareEmployer pays1.45%
Additional Medicare tax (over $200k wages)Employee pays0.9%
Federal Unemployment (FUTA)Employer only0.6%*
State Unemployment (SUTA/SUI)Employer onlyVaries by state
Federal income tax withholdingEmployee's taxPer W-4
State income tax withholdingEmployee's taxPer state
Hawaii TDI (Temp Disability Insurance)Both paySplit 50/50

*FUTA is 6% on first $7,000 of wages but drops to 0.6% after the state unemployment tax credit for most employers.

Payroll taxes are "trust fund" taxes. When you withhold federal income tax and FICA from employee paychecks, you're holding that money in trust for the government. Failing to deposit withheld taxes — even temporarily using it for business expenses — is one of the most serious tax violations. The IRS imposes the Trust Fund Recovery Penalty personally against business owners.

Self-employment tax — what it is and how to reduce it

If you work for yourself — sole prop, single-member LLC, S-Corp owner — you deal with self-employment tax. Here's exactly how it works.

12.4%
Social Security portion
On net self-employment income up to $168,600 (2024 wage base). Resets January 1 each year.
2.9%
Medicare portion
On ALL net self-employment income — no cap. Additional 0.9% kicks in above $200,000.
15.3%
Total SE tax rate
Combined Social Security + Medicare. You pay both the employee AND employer share.
92.35%
Taxable income multiplier
SE tax is calculated on 92.35% of net profit — not 100%. This accounts for the employer deduction.
50%
SE tax deduction
You can deduct half of your SE tax on Form 1040 — reducing your AGI before income tax is calculated.
S-Corp
The main reduction strategy
Electing S-Corp status moves profit from SE tax to distributions — only salary is subject to payroll taxes.
How SE tax is actually calculated — step by step
1
Start with your net profit from Schedule CYour gross revenue minus all business expenses = net profit. This is the starting number for SE tax calculation. Example: $80,000 net profit.
2
Multiply by 92.35%$80,000 × 0.9235 = $73,880. This adjustment accounts for the fact that employees only pay SE tax on wages (not on the employer's share of payroll taxes). You get the same treatment.
3
Multiply by 15.3%$73,880 × 0.153 = $11,304. This is your total SE tax for the year. It goes on Schedule SE and flows to Form 1040.
4
Deduct half on your 1040$11,304 ÷ 2 = $5,652. You deduct this amount on Schedule 1, Line 15 of Form 1040 — reducing your AGI before income tax is calculated. This partially offsets the burden of paying both sides.Don't forget this deduction — it's automatic but must be claimed

How to legally reduce SE tax

1
Elect S-Corp statusThe most powerful SE tax reduction strategy. By paying yourself a reasonable salary and taking additional profit as distributions, only the salary portion is subject to payroll taxes. At $80k profit with a $50k salary, you save roughly $4,590/yr in SE tax.See the LLC vs S-Corp guide for full details
2
Maximize retirement contributionsSEP-IRA and Solo 401k contributions reduce your net self-employment income — which reduces the base on which SE tax is calculated. A $20,000 SEP-IRA contribution reduces SE tax by about $3,060 (15.3% × $20,000).
3
Claim every legitimate business deductionEvery dollar of business expense reduces your net profit — which reduces both income tax AND SE tax. Home office, mileage, health insurance, and all other legitimate deductions reduce your SE tax burden dollar for dollar.

Payroll taxes as an employer — what you owe

The moment you hire your first employee, you take on significant new tax obligations. Here's every payroll tax you're responsible for as an employer.

The real cost of an employee is 18–25% more than their salary. On top of salary, employers pay FICA matching (7.65%), FUTA (0.6%), SUTA (varies), workers comp insurance, and in Hawaii — TDI and the Prepaid Health Care Act. Model the full cost before making your first hire.
Federal payroll taxes
FICA
Social Security + Medicare matching — 7.65% of each employee's wagesYou pay 6.2% Social Security + 1.45% Medicare on every dollar of employee wages up to the Social Security wage base ($168,600 in 2024). No cap on Medicare. This is your match of what the employee also pays — total FICA is 15.3% split evenly.Deposited via EFTPS — not sent with your tax return
FUTA
Federal Unemployment Tax — 0.6% on first $7,000 of each employee's wagesFUTA funds federal unemployment benefits. The statutory rate is 6% but employers who pay state unemployment on time receive a 5.4% credit — making the effective rate 0.6%. Maximum FUTA per employee: $42/yr. Reported on Form 940 annually.Very small cost — but Form 940 must still be filed
FIT
Federal income tax withholding — varies by employeeYou withhold federal income tax from employee paychecks based on their W-4 elections. This is the employee's tax — you're just collecting and remitting it. The amount varies based on wages, filing status, and W-4 allowances.
Real cost of a $50,000 employee — full breakdown
Employee salary$50,000
FICA matching (7.65%)+$3,825
FUTA (0.6% on $7k)+$42
Hawaii SUI (~2.4% on $56k wage base)+$1,344
Hawaii TDI (employer share)+$estimated
Hawaii Prepaid Health Care (min 1.5% wages)+$750
Workers comp insurance (varies by industry)+$500–2,000
True total employer cost~$57,000–59,000
A $50,000 salary costs you $57,000–$59,000 when all employer taxes and required Hawaii benefits are included. Factor this into your pricing, your hiring decisions, and your cash flow projections before making an offer.

Hawaii-specific payroll taxes and requirements

Hawaii has several employment tax requirements that are unique in the US — or more stringent than most states. Know these before you hire your first employee.

Hawaii's unique employer requirements
TDI
Temporary Disability Insurance — required for employees 20+ hrs/week Hawaii is one of only 5 states requiring TDI. It provides wage replacement for employees who can't work due to a non-work-related illness or injury. Employers must either purchase a private TDI policy or pay into the state plan. Employee and employer share the cost — each pays roughly half. Required before first eligible employee
PHC
Prepaid Health Care Act — health insurance required for 20+ hrs/week employees The Hawaii Prepaid Health Care Act requires employers to provide health insurance to employees working 20 or more hours per week for 4 consecutive weeks. Employer must pay at least 1.5% of employee's wages toward the premium. Employees cannot be required to pay more than 1.5% of their wages for coverage. Unique to Hawaii — no other state requires this
SUI
State Unemployment Insurance — employer-only tax Hawaii's SUI rate varies based on your employer experience rating — new employers start at a standard rate (currently around 2.4%) applied to the first $56,700 of each employee's wages. As your employment history builds, the rate adjusts up or down based on claims made against your account. New employer rate applies for first few years
WC
Workers Compensation — required for all employees All Hawaii employers with one or more employees must carry workers compensation insurance. Rates vary significantly by industry — office workers are cheap, construction workers are expensive. Get quotes from multiple providers. Administered through private insurers or the Hawaii Employers' Mutual Insurance Company (HEMIC).
Hawaii payroll tax filing requirements
HW-3
Hawaii Withholding Tax ReturnQuarterly return reporting Hawaii income tax withheld from employee wages. Due last day of month following quarter — Jan 31, Apr 30, Jul 31, Oct 31. File with Hawaii DoTax.
Quarterly
HW-14
Annual Reconciliation of Withholding TaxAnnual reconciliation of all HW-3s. Reconciles W-2s issued to employees. Due February 28 following the tax year.
Feb 28
UC-B6
Quarterly Unemployment Insurance ReportSUI contributions filed with Hawaii Department of Labor. Reports wages and calculates UI taxes. Due last day of month following each quarter.
Quarterly
HW-2
Hawaii Wage and Tax Statement (state W-2)Hawaii equivalent of the federal W-2. Must be provided to employees by January 31. Filed with Hawaii DoTax along with HW-14.
Jan 31

Payroll tax calculator

Estimate your total payroll tax cost for an employee — both what you withhold from their paycheck and what you pay as the employer.

$50,000
—
$3,825
employee FICA withheld
$4,316
est. federal withholding
$41,859
employee take-home (est.)
$3,825
employer FICA cost
$42
employer FUTA cost
$53,867
total employer cost
This calculator estimates federal taxes only. Add Hawaii SUI (~$1,344), TDI, workers comp, and health insurance premiums to get your true total cost per employee in Hawaii.

Every payroll form and deadline

Federal payroll forms
941
Employer's Quarterly Federal Tax ReturnFiled every quarter. Reports wages paid, federal income tax withheld, and FICA taxes (both employee and employer share). Due the last day of the month following each quarter.
Apr 30 · Jul 31 · Oct 31 · Jan 31
940
Employer's Annual Federal Unemployment Return (FUTA)Filed annually — reports total wages paid and calculates FUTA tax. Due January 31. Deposit FUTA quarterly if liability exceeds $500.
Jan 31
W-2
Wage and Tax StatementIssued to each employee by January 31. Reports annual wages and all taxes withheld. Also filed with the Social Security Administration by January 31.
Jan 31
W-3
Transmittal of Wage and Tax StatementsCover sheet submitted with W-2s to the Social Security Administration. Summarizes all W-2s. Filed by January 31. Done automatically through most payroll software.
Jan 31
1099-NEC
Nonemployee CompensationIssued to contractors you paid $600+ during the year. Due January 31. Also filed with the IRS by January 31. Get W-9 before first payment — not at year end.
Jan 31
W-4
Employee's Withholding CertificateCompleted by each new employee. Tells you their filing status and adjustments for withholding calculation. Keep on file — not submitted to IRS. Update when employee's situation changes.
At hire
Payroll deposit schedule — when to send the money to the IRS
Monthly
Monthly depositor — if total payroll tax liability is under $50,000/yrMost small businesses. Deposit withheld taxes (federal income + FICA employee + FICA employer) by the 15th of the following month. Pay January taxes by February 15, February taxes by March 15, etc.
Semi-weekly
Semi-weekly depositor — if total payroll tax liability exceeds $50,000/yrIf you paid wages on Wednesday, Thursday, or Friday — deposit by the following Wednesday. If you paid on Saturday, Sunday, Monday, or Tuesday — deposit by the following Friday. More frequent, more complex.
Never miss a payroll tax deposit. The IRS charges failure-to-deposit penalties of 2%–15% of the amount due depending on how late it is. For withheld employee taxes, the Trust Fund Recovery Penalty can make you personally liable even if you have an LLC. Always deposit on time.

Payroll software — do not do this manually

Payroll is one area where the DIY approach almost always costs more than it saves. The compliance requirements, deposit schedules, and multi-state rules make manual payroll a liability. Here are the best options.

1
Gusto — best for most small Hawaii businesses Full-service payroll with automatic federal and state tax deposits, W-2s, and compliance alerts. Hawaii-specific features including TDI and workers comp integrations. $40/mo base + $6/employee/mo. Handles all deposits automatically — you just run payroll. Our top recommendation for Hawaii founders
2
QuickBooks Payroll — best if already using QuickBooks Seamless integration with QuickBooks accounting. Automatic tax calculations and deposits. $45–$125/mo depending on plan. The Elite plan includes tax penalty protection — QuickBooks pays IRS penalties if their calculations are wrong. Best if you use QuickBooks for bookkeeping
3
ADP Run — best for growing businesses Enterprise-grade payroll with deep HR features. More expensive but highly reliable. Popular with businesses that have complex payroll needs — multiple pay rates, garnishments, large teams. Pricing by quote. Best for 10+ employees or complex payroll
For S-Corp owners paying themselves a salary: You still need payroll software even if you're the only employee. Running payroll for yourself as an S-Corp owner-employee requires proper withholding, quarterly deposits, and W-2 generation. Gusto makes this simple for $46/mo — well worth it to stay compliant.

Hiring your first employee?

Check out the full hiring guide — everything from job offers to onboarding compliance.

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