Payroll
Tax Withholding
Income and payroll tax an employer takes out of each paycheck and remits to the government on the employee's behalf. A high-precision planning lever for owners, not just a paperwork line.
The U.S. tax system is pay-as-you-go, and withholding is how W-2 employees pay as they go. Each paycheck, the employer deducts federal income tax (based on the employee's Form W-4), the employee's share of FICA, and any state and local income tax, then deposits those amounts with the tax agencies on a strict schedule.
Withholding is a prepayment, not the final tax; the annual return settles up. Where owners get burned is supplemental income: bonuses, RSU vests, and option exercises are typically withheld at a flat federal supplemental rate (22% below $1M) that is far below a high earner's actual marginal rate, producing a large balance due at filing.
Business owners paid on K-1s or Schedule C have no withholding at all; they cover the same obligation through quarterly estimated tax payments. S-corp owner-employees can use extra W-2 withholding late in the year as a planning lever, since withholding is treated as paid evenly through the year regardless of when it happened — a full-year underpayment penalty can be zeroed out by a large December W-2 withholding that could not be replicated with a December estimated payment.
State withholding runs in parallel and is where multi-state owners and remote workforces get complicated. An employee living in one state and working in another usually requires withholding in both, with credit taken on the resident return; the wrong split creates a filing chore every April and, in states with convenience-of-employer rules (NY, PA, NJ), can produce a hard double-tax if handled naively. Set up multi-state withholding at hire, not at year-end.
Backup withholding at 24% applies to 1099-reportable payments when a vendor's TIN is missing, invalid, or has been notified as such by the IRS. Businesses that pay contractors without collecting a Form W-9 first are on the hook for the backup withholding themselves — a common six-figure surprise on a small business that grew fast and skipped the vendor-onboarding step.
Common pitfalls
- Leaving the W-4 untouched after a raise, a second household income, or large equity vests; the default tables won't keep up
- Assuming the 22% supplemental withholding on a bonus or RSU vest covers the tax; top-bracket earners owe the difference in April
- Missing federal deposit deadlines as an employer; payroll tax deposit penalties escalate fast and the trust-fund recovery penalty reaches owners personally
- Onboarding a vendor without a W-9 and issuing 1099s at year-end; missing TINs trigger backup-withholding liability the business absorbs
- Treating an owner's spouse or child on payroll as automatically covered by household withholding rules; the same W-4 discipline still applies, and misclassifying can void the wages as a business expense
Related service
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Multi-state payroll, contractor 1099s, and payroll tax filings run on schedule, then reconciled straight into your books.