Payroll tax is the federal and state taxes you withhold from employee paychecks plus the taxes you pay as an employer on wages. This includes Social Security, Medicare, federal and state unemployment insurance, and income tax withholding.

As an employer, you withhold Social Security and Medicare from employee paychecks and match those amounts dollar for dollar. You also withhold federal and state income taxes based on employee W-4 forms and pay federal and state unemployment taxes.

These taxes get deposited on different schedules depending on your payroll size. Small businesses typically deposit monthly. Miss a deposit deadline and you owe penalties even if you eventually pay the taxes.

Payroll processing services handle all the calculations, deposits, and filings so you stay compliant. The penalties for payroll tax mistakes are severe and personal liability often follows business owners even if the company goes under.

Payroll taxes are the most expensive tax mistake small businesses make. The IRS prioritizes collecting unpaid payroll taxes over almost everything else.