Good morning! Nobody has ever described payroll taxes as fun. The IRS has not tried to market them as such. And yet, understanding them turns out to be one of the more consequential things a business owner can do, short of actually making money.

This week’s lineup:

💸 First employee? Here’s what the IRS expects next.
🗓 The deposit schedule that catches new employers off guard.
🧮 Your S-Corp salary: the IRS has opinions about it.
📋 Free this week: the 2026 employer payroll setup checklist.

The Basics

💸 You have employees. Now pay them right.

Image from Envato

The Quick & Bristly: Hiring your first employee triggers a stack of federal and state obligations that have nothing to do with writing a check. Miss one and the IRS finds out before you do.

Hiring someone feels like a milestone. And it is. It’s also the moment you quietly sign up for a relationship with the IRS, your state’s department of labor, the Social Security Administration, and (if you’re lucky) a payroll tax deposit schedule that arrives before your first cup of coffee on the 15th.

Here’s what kicks in the moment you have an employee on payroll:

Federal income tax withholding. You’re now a collection agent for the IRS. The amount you withhold is determined by the employee’s Form W-4. File the W-4. Keep it on file. Don’t guess.
FICA taxes. You withhold 6.2% Social Security and 1.45% Medicare from the employee’s wages. Then you match it. So every dollar of Medicare tax your employee pays, you pay another dollar yourself. Congratulations on your new hobby.
Federal unemployment tax (FUTA). You pay this one alone. Employees don’t contribute. The rate is 6% on the first $7,000 of each employee’s wages, though a credit reduces it to 0.6% if your state unemployment taxes are current.
Payroll tax deposits. Withheld taxes don’t sit in your checking account until April. They’re deposited on a schedule, monthly or semi-weekly depending on your total liability. Missing a deposit triggers a penalty that starts at 2% and climbs fast.

The IRS Publication 15 (Circular E) is your operating manual for all of this. It’s updated every year and it’s free.

👉 IRS Publication 15 (Employer’s Tax Guide)

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True or False: If the IRS determines you are personally liable for your company’s unpaid payroll taxes, your LLC or corporation protects you from having to pay them out of pocket.

(Find the answer at the end of this newsletter)

The Strategy

🗓 The payroll tax deposit nobody told you about

Photo from Unsplash

The Quick & Bristly: Most new employers default to monthly payroll tax deposits, which sounds fine, until you miss one and learn the penalty schedule. Here’s how the deposit system actually works and how to not blow it.

The federal payroll tax deposit system is one of those things that seems straightforward, right up until you explain it to someone and watch their face go slack.

When you withhold federal income tax, Social Security, and Medicare from employees’ wages, that money is owed to the IRS on a schedule, not at year-end, not at tax time, but on a rolling basis throughout the year. How often depends on your “lookback period,” which is the total employment taxes you reported during a specific 12-month window ending June 30 of the prior year.

Monthly depositors reported $50,000 or less during that period. Deposits are due by the 15th of the following month. Manageable.
Semi-weekly depositors reported more than $50,000. If you paid wages on Wednesday, Thursday or Friday, your deposit is due the following Wednesday. If you paid on any other day, it’s due the following Friday. The IRS did not design this system to be soothing.

New employers default to monthly status.

The penalties for missing a deposit are tiered:

2% for deposits 1–5 days late
5% for 6–15 days
10% after 15 days
15% if the IRS has to come looking

These are not suggestions.

The Electronic Federal Tax Payment System (EFTPS) is how you actually make these deposits. Allow 5–7 business days to enroll before your first payroll run. It will not be available same-day when you need it.

👉 EFTPS enrollment and deposit scheduling

The Deep Dive

🧮 The S-Corp salary trap most owners walk right into

Image from Evanto

The Quick & Bristly: If you own an S-Corp and take distributions instead of a salary to avoid payroll taxes, the IRS has a name for that strategy: audit bait. Here’s how reasonable compensation actually works and what’s at stake.

The S-Corp payroll tax advantage is real, and it is genuinely attractive. Unlike a sole proprietor, who pays self-employment tax on every dollar of net profit, an S-Corp owner splits their income into two buckets:

Salary (subject to payroll taxes)
Distributions (not subject to payroll taxes)

The strategy works. The IRS knows it works. They also know some people take it too far.

The requirement is that shareholder-employees must pay themselves a “reasonable compensation,” a salary that reflects what the market would pay someone else to do the same job. This is not a number you choose because it feels comfortable. It is a number the IRS will compare against industry data if they decide to look.

What happens when the salary is too low? The IRS reclassifies distributions as wages, assesses back payroll taxes, adds interest, and adds penalties. The IRS has successfully litigated these cases consistently. The relevant cases go back decades and the outcomes are not surprising.

What reasonable compensation actually involves:

Industry wage surveys and comparable job postings are legitimate ways to check what is “reasonable” for your industry
Your company’s revenue matters. What a 10-person firm would pay a CEO is different from what a one-person consultancy would
Services actually performed matter. If you’re working full-time in the business, a part-time salary will raise flags
The IRS’s own guidance cites factors including training, experience, duties and responsibilities, and comparable businesses

The Social Security wage base for 2026 is $184,500. For a business owner trying to minimize payroll taxes, that number sets a practical ceiling on what the optimization looks like, but only if the underlying salary is defensible.

This is an area where documenting your reasoning in advance is worth considerably more than explaining it during an examination.

👉 IRS guidance on S-Corp reasonable compensation

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The Freebie

🗂 The 2026 employer payroll setup checklist

Image from Evanto

Everything in today’s issue, turned into a step-by-step action list. Every deposit deadline, registration, and filing obligation, in order, before your first penalty.

Download the Free 2026 Employer Payroll Checklist →

🎙️ Listen: Main Street Business “What Every New LLC Owner Must Do to Avoid Costly Mistakes.” No fluff, no upsell, just the mechanics, explained by two people who have done this with thousands of clients.
🛠️ Use: The IRS “Starting a Business” Resource Hub. It’s not flashy, but it’s authoritative and current. The IRS has organized every federal requirement for new businesses (EIN application, entity type guidance, tax calendar, employment tax setup, estimated tax instructions) in one place.
📖 Read: “Sales Tax by State: Economic Nexus Laws.” A clean, current, state-by-state breakdown of every economic nexus threshold in the country. The dollar amounts, the transaction thresholds where they still exist, and how each state measures the lookback period. Updated regularly as state laws change.
🚀 Try: Deel (sponsored). Your best hire this year might be in Portugal. Or the Philippines. Or Pittsburgh. Deel pays them all, compliantly, in one place.

Answer: ❌ False!

Under IRC Section 6672, the IRS’s Trust Fund Recovery Penalty allows them to bypass your LLC or corporation entirely and pursue any “responsible person” personally for 100% of the unpaid employee withholdings. Think owners, officers, and even bookkeepers with check-signing authority. The debt survives bankruptcy in most cases, so closing the business won’t make it go away.

You're reading an archived edition of TaxStache.

📋 Payroll 101: what nobody tells new employers