Employees change everything
about your tax obligations.
The moment you hire your first employee, you take on a new set of tax liabilities — deposit schedules, payroll returns, workers comp, FUTA — that have hard deadlines and steep penalties when missed. This page covers what you actually owe and when.
Where are you in your business journey?
True cost calculator
An employee costs more than their wage.
The wage is what you advertise. The true cost includes employer Social Security (6.2%), employer Medicare (1.45%), federal unemployment tax (0.6% on first $7,000), state unemployment, and workers comp — before you add any benefits. Most employers underestimate by 20–30%.
Varies by industry: office/retail ~1–2%, salon/restaurant ~2–3%, construction/trades ~5–15%. Check your actual policy.
New employer rates vary by state — CA ~3.4%, TX ~2.7%, FL ~2.7%, NY ~4.0%. Applied to first ~$10,000 of wages. Your actual rate appears on your state UI tax notice.
Health insurance, 401(k) match, PTO accrual — the benefits you actually pay for
Cost per employee (annual)
True cost per employee
$40,636
/year
True hourly cost
$24.42
vs $22.00 wage
Does this hire pencil out?
Revenue this employee needs to generate to hit your labor cost target. If this role is revenue-generating (stylist, trainer, server), use actual production. If it's support staff, allocate a share of total revenue.
25% labor
$162,543
revenue/yr
30% labor
$135,452
revenue/yr
35% labor
$116,102
revenue/yr
30% is a common labor cost target for service businesses. Adjust based on your margins — a high-margin business can support more labor cost per revenue dollar.
Estimates only. FUTA uses 0.6% net rate (assumes full 5.4% state credit). SUTA applied to first ~$10,000 of wages — actual wage base varies by state ($7k–$65k). Workers comp rates are industry estimates — actual rates depend on experience modification and your policy. Does not include paid leave mandates, retirement contributions beyond what's shown, or training costs. Consult a CPA and HR advisor.
Payroll tax deposit rules
Payroll taxes are not deposited with every paycheck — they follow a separate deposit schedule set by the IRS. Miss the deadline and you'll face a failure-to-deposit penalty of 2–15% of the unpaid amount.
Monthly depositor
Most new employers start hereTriggers when: Total payroll taxes in the lookback period were $50,000 or less
Deposit by: 15th of the following month
Semi-weekly depositor
Applies to most established businessesTriggers when: Total payroll taxes in the lookback period exceeded $50,000
Deposit by: Wed/Fri based on payday: pay Wed–Fri → deposit by following Wed; pay Sat–Tue → deposit by following Fri
Next-day rule
Triggers automatically — even for monthly depositorsTriggers when: Single payroll tax deposit exceeds $100,000
Deposit by: Next banking day
Contractor vs employee: get this wrong and it's expensive
Misclassifying employees as independent contractors is one of the most common (and costly) employment tax mistakes. If the IRS reclassifies a contractor as an employee, you owe back payroll taxes, penalties, and interest — for every year of misclassification.
Signs of an independent contractor
- Sets their own schedule and methods
- Works for multiple clients
- Uses their own tools and equipment
- Can subcontract the work
- Has their own business entity or license
- Paid per project or deliverable
Signs the IRS may reclassify as employee
- You control when and how they work
- They work exclusively (or nearly so) for you
- You provide their tools or workspace
- They've worked for you for years without a project end date
- Their rate is set hour-by-hour like a wage
- You'd fire them the same way you'd fire an employee
California applies an even stricter test (ABC test under AB5) that presumes worker status is employee unless the business can affirmatively show otherwise. If you're in California and using contractors regularly, this deserves a direct conversation with a CPA.
Deductions most location-based owners are entitled to
Make sure these are being captured correctly before filing.
Employee wages and salaries
Fully deductible when paid
Employer payroll taxes (FICA, FUTA, SUTA)
Deductible business expense
Rent and lease payments
Deductible when paid; prepaid rent only deductible in the period it covers
Utilities and internet
Fully deductible for dedicated business space
Equipment and furniture (Section 179 / Bonus)
Potentially 100% deductible in year purchased
Business insurance and liability premiums
General liability, workers comp, errors and omissions
Employee benefits (health, dental, retirement match)
Deductible; retirement match is especially tax-efficient
Repairs and maintenance
Deductible; major improvements must be capitalized
Point-of-sale software, inventory systems
Software subscription costs are immediately deductible
Advertising and marketing
Signage, social, promotions — deductible when paid
Essential reading for employers
Articles for businesses with employees
Hiring Your First Employee: The Compliance Checklist Most Owners Skip
I-9, workers comp, EDD registration, payroll service — the step-by-step guide to what must exist before your first employee's first day.
Read BookkeepingBusiness Expense Categories: What to Track and How to Enter It
QuickBooks and Xero category names for every common expense, plus the auto, meals, and home office special rules.
Read Tax deductionsSection 179 and Bonus Depreciation: Deduct Equipment and Vehicles in Year One
The rules for immediate expensing, the bonus depreciation phase-out schedule, and vehicle limits for businesses with equipment purchases.
Read Tax deductionsWhat Actually Counts as a Business Write-Off
Which expenses are clearly deductible, which are limited, and the documentation required to defend each category.
ReadMore planning tools
Quarterly Estimate Planner
Build a quarterly payment schedule even with employee payroll in the picture
OpenEntity Structure Analyzer
S-corp vs LLC at your current profit level
OpenBusiness Cash Planner
How much cash should stay in the business vs get distributed
OpenRetirement Contribution Maximizer
SIMPLE IRA vs SEP vs Solo 401(k) for businesses with employees
OpenYear-Round Tax Calendar
941 due dates, FUTA deposits, annual filings — in one place
OpenS-Corp Tax Planning Guide
If your profits warrant an S-corp election, this is the full picture
OpenCommon questions
How often do I have to make payroll tax deposits?+
It depends on your lookback period (the four quarters ending June 30 of the prior year). New employers start as monthly depositors, which means you deposit by the 15th of the following month. Once your payroll taxes exceed $50,000 in a lookback period, you become a semi-weekly depositor with much tighter deadlines. A payroll service (Gusto, Rippling, ADP) handles all of this automatically.
Do I have to provide health insurance to employees?+
Under the ACA, employers with 50+ full-time equivalent employees are required to offer affordable health coverage or face a penalty. Below 50 FTEs, it's optional but competitively expected for attracting good employees. If you do offer it, the employer contribution is fully deductible. California has additional state-level rules.
What's the difference between the 941 and 940?+
Form 941 is the quarterly payroll tax return you file to report wages and payroll taxes withheld (filed April, July, October, January). Form 940 is the annual FUTA (federal unemployment) return, filed once per year by January 31 for the prior year. Both are in addition to your income tax returns.
Can I still do an S-corp if I have employees?+
Yes — S-corps are entirely compatible with having employees. The owner still takes a W-2 salary and the SE tax savings on distributions still apply. The payroll setup is already required once you have employees, so the marginal cost of adding the S-corp structure is lower than for a solo operator.
My business is a franchise. Does the franchisor handle my payroll taxes?+
No. As a franchise owner, you are the employer — not the franchisor. You handle all federal and state employment taxes for your employees. The franchisor provides operating systems and brand, but the tax obligations are entirely yours. Confirm this with your franchise agreement and talk to a CPA who understands the franchisor/franchisee relationship.
Work with Matt
Ready to build a plan?
Payroll taxes, deposit schedules, employee classification — these have real penalties when they go wrong. A proactive CPA catches the issues before they become problems.
Tax services provided through Matt Reese, CPA. This page is educational and does not constitute tax or investment advice.