10.1 Federal Payroll Taxes, FICA, FUTA, and IRS Deposit Deadlines

Payroll tax administration is one of the highest-risk compliance responsibilities for a Tennessee construction contractor. Unlike ordinary trade payables, federal payroll taxes involve strict electronic deposit deadlines measured in days, automatic late-deposit penalty tiers, and a federal statutory mechanism that strips away corporate or LLC limited liability if employee withholdings are diverted to pay jobsite expenses. On the Tennessee Business and Law examination, candidates must master the exact rates, wage bases, filing dates, lookback thresholds, and personal liability rules published in IRS Publication 15 (Circular E, Employer's Tax Guide).

Employer Identification Number (EIN), Form W-4, and Recordkeeping

Before hiring its first employee—or whenever operating as a corporation, partnership, or multi-member LLC even without employees—a construction business must obtain a nine-digit Employer Identification Number (EIN) from the Internal Revenue Service by filing IRS Form SS-4 (Application for Employer Identification Number). An EIN is also required if a sole proprietorship hires employees, establishes a qualified retirement plan, or changes its legal entity structure (for example, incorporating a sole proprietorship into an LLC or C-Corporation).

• IRS Form W-4 (Employee's Withholding Certificate): Every newly hired employee must complete and sign Form W-4 on or before their first day of work so the contractor can calculate how much federal income tax to withhold from each paycheck. Form W-4 remains in effect until the employee furnishes a revised certificate.
• Default Withholding Rule When Form W-4 Is Missing: If a newly hired employee fails or refuses to provide a properly completed and signed Form W-4 before the first payroll is run, IRS Publication 15 requires the employer to withhold federal income tax as if the employee checked the box for Single or Married filing separately with no other adjustments in Steps 2, 3, and 4. This statutory default results in the highest standard payroll withholding rate.
• Mandatory 4-Year Employment Tax Record Retention: While the Fair Labor Standards Act (FLSA) requires basic payroll records to be kept for 3 years, the Internal Revenue Code and IRS Publication 15 require every employer to retain all employment tax records for at least 4 years after the date the tax becomes due or the date the tax is paid, whichever is later. Retained records must include the employer's EIN, copies of all filed Forms 941, 940, W-2, and W-3, dates and amounts of all EFTPS tax deposits, employee names, addresses, Social Security numbers, signed Forms W-4, and gross-to-net wage calculations for each pay period.

---

FICA Taxes: Social Security, Medicare, and Additional Medicare Tax

Under the Federal Insurance Contributions Act (FICA), both the employer and the employee contribute matching percentages of gross wages to fund two federal programs: Social Security (Old-Age, Survivors, and Disability Insurance, or OASDI) and Medicare (Hospital Insurance).

$$\text{Standard FICA Tax} = \underbrace{7.65\%}_{\text{Employee Withholding } (6.2\% + 1.45\%)} + \underbrace{7.65\%}_{\text{Employer Match } (6.2\% + 1.45\%)} = 15.3\% \text{ Combined}$$

• Social Security (OASDI) Tax (6.2% Employee + 6.2% Employer = 12.4% Total): The employer must withhold 6.2% from the employee's gross wages and pay a matching 6.2% out of the contractor's own funds, for a combined rate of 12.4%. Social Security tax applies only up to the annual Social Security taxable wage base limit (adjusted annually for inflation). Once an employee's cumulative year-to-date gross wages paid by that employer reach the annual wage cap, both the employee withholding and the employer match for Social Security stop for the remainder of the calendar year.
• Standard Medicare Tax (1.45% Employee + 1.45% Employer = 2.9% Total): The employer must withhold 1.45% from the employee's gross wages and pay a matching 1.45% employer share, for a combined rate of 2.9%. Crucially, there is NO wage base cap on Medicare tax: 100% of all covered wages, bonuses, and overtime are subject to standard Medicare tax regardless of how much the employee earns.
• Additional Medicare Tax (0.9% Over $200,000 — Employee Only): In addition to the standard 1.45% Medicare tax, an employer is legally required to withhold an extra 0.9% Additional Medicare Tax on an employee's wages paid in excess of $200,000 in a calendar year (bringing the employee's total Medicare withholding rate on wages above $200,000 to $1.45\% + 0.9\% = 2.35\%$). There is NO employer match on the 0.9% Additional Medicare Tax—the employer continues to pay only its standard 1.45% share on wages above $200,000.

---

IRS Form 941 Quarterly Returns and EFTPS Deposit Schedules

Every employer who withholds federal income tax or FICA taxes must report those liabilities quarterly on IRS Form 941 (Employer's Quarterly Federal Tax Return) and deposit the funds electronically via the Electronic Federal Tax Payment System (EFTPS).

Form 941 Quarterly Filing Deadlines (and Form 944 Exception)

Form 941 is due on or before the last day of the month following the end of each calendar quarter:

• Quarter 1 (January, February, March): Due April 30
• Quarter 2 (April, May, June): Due July 31
• Quarter 3 (July, August, September): Due October 31
• Quarter 4 (October, November, December): Due January 31 of the following calendar year

(Note: If an employer deposited 100% of its quarterly tax liability on time and in full, the IRS grants an automatic 10-day filing extension to May 10, August 10, November 10, and February 10. Conversely, very small employers whose total annual employment tax liability is $1,000 or less may receive written IRS authorization to file Form 944 annually by January 31 instead of quarterly Forms 941.)

The 4-Quarter Lookback Period and EFTPS Deposit Schedules

Filing Form 941 is separate from depositing the taxes. Before each calendar year begins, an employer determines its mandatory EFTPS deposit schedule by reviewing the aggregate Form 941 taxes it reported during a 4-quarter lookback period running from July 1 of the second preceding year through June 30 of the prior year (for example, for calendar year 2026, the lookback period covers Q3 2024, Q4 2024, Q1 2025, and Q2 2025):

1. Under $2,500 Quarterly Rule: If an employer's total Form 941 tax liability is less than $2,500 for the current quarter (or the preceding quarter, without incurring a $100,000 next-day deposit obligation), it is not required to make monthly or semi-weekly deposits and may pay the full balance directly with its timely filed Form 941 return.
2. Monthly Schedule Depositor (Lookback Liability <= \$50,000): If total Form 941 taxes reported during the 4-quarter lookback period were $50,000 or less, the employer is a Monthly Depositor. Because a new employer has zero tax history during its lookback period, every new employer is automatically classified as a Monthly Depositor in its first year of business. A Monthly Depositor must deposit the employment taxes accumulated during each calendar month via EFTPS on or before the 15th day of the following month (e.g., March payroll taxes must be deposited by April 15).
3. Semi-Weekly Schedule Depositor (Lookback Liability > \$50,000): If total Form 941 taxes reported during the 4-quarter lookback period were more than $50,000, the employer is a Semi-Weekly Depositor. Deposits are determined by the day of the week on which payday occurs:
   • Payday on Wednesday, Thursday, or Friday: Deposit is due by the following Wednesday.
   • Payday on Saturday, Sunday, Monday, or Tuesday: Deposit is due by the following Friday.
4. The $100,000 Next-Day Deposit Rule: If any employer (whether Monthly or Semi-Weekly) accumulates $100,000 or more in undeposited Form 941 taxes on any day during a deposit period, the employer MUST deposit the full amount by the close of the NEXT BUSINESS DAY. Furthermore, any Monthly Depositor that triggers the $100,000 Next-Day Rule immediately ceases to be a Monthly Depositor and becomes a Semi-Weekly Depositor for the remainder of the current calendar year and for the entire following calendar year.

---

Federal Unemployment Tax Act (FUTA — IRS Form 940)

Under the Federal Unemployment Tax Act (FUTA), employers fund federal oversight of state unemployment programs. Unlike FICA, FUTA is paid 100% by the employer—a contractor is strictly prohibited from deducting or withholding FUTA from employee paychecks.

$$\text{Net FUTA per Employee} = \text{\textdollar}7,000 \times (6.0\% \text{ Gross Rate} - 5.4\% \text{ Max State Credit}) = \text{\textdollar}7,000 \times 0.6\% = \text{\textdollar}42.00$$

• FUTA Wage Base and Net Rate (0.6% / \$42.00 Max): The statutory gross FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year. Employers who pay their state unemployment taxes (SUTA) on time and in full receive a maximum 5.4% credit, reducing the effective net FUTA rate to 0.6% ($6.0\% - 5.4\% = 0.6\%$), or a maximum of $42.00 per employee per year once an employee reaches $7,000 in annual wages.
• Quarterly $500 FUTA Deposit Threshold and Annual Form 940: Employers file IRS Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return) annually by January 31 (or February 10 if all required deposits were timely). However, FUTA deposit liability must be checked at the end of each calendar quarter: if cumulative undeposited FUTA tax exceeds $500, the employer must deposit it via EFTPS by the last day of the month following the end of the quarter (April 30, July 31, October 31, or January 31). If cumulative undeposited FUTA is $500 or less, it is rolled over to the next quarter.

---

Trust Fund Recovery Penalty (IRC § 6672 — 100% Personal Liability)

Federal income taxes and the employee's 7.65% share of FICA withheld from employee paychecks are called "trust fund taxes" because the contractor holds that money in statutory trust for the U.S. Treasury. Under Internal Revenue Code (IRC) § 6672, if a business fails to remit withheld trust fund taxes—for example, using payroll withholdings to pay a concrete supplier or equipment lessor during a cash crunch—the IRS can assess the Trust Fund Recovery Penalty (TFRP):

• 100% Personal Penalty Piercing the Corporate/LLC Shield: The penalty equals 100% of the unpaid trust fund taxes (withheld employee income tax plus the employee's 7.65% FICA share) and is assessed personally against every "responsible person" who willfully failed to collect, account for, or pay over the tax.
• Who Is a "Responsible Person"? Any corporate officer, director, LLC member/manager, Qualifying Agent, or controller/bookkeeper who has authority to sign checks or decide which creditors get paid. Choosing to pay material suppliers or jobsite bills while knowing withheld payroll taxes remain unpaid satisfies the legal definition of "willfulness." Corporate or LLC limited liability never protects a responsible person's personal bank accounts or real estate from the 100% Trust Fund Recovery Penalty.

Worked Numeric Example: Form 941 Payroll Tax, FUTA Threshold, and IRC § 6672 Trust Fund Calculation

Suppose Cumberland Commercial Builders, LLC employs 10 full-time carpenters during Quarter 1 (January–March), paying each carpenter $12,000 in Q1 gross wages ($120,000 total Q1 payroll), and withholds $14,000 in total federal income tax across the crew:

1. Employee FICA Withheld: $\text{\textdollar}120,000 \times 7.65\% = \text{\textdollar}9,180$ ($7,440 Social Security + $1,740 Medicare).
2. Employer FICA Match: $\text{\textdollar}120,000 \times 7.65\% = \text{\textdollar}9,180$.
3. Total Q1 Form 941 Liability: $\text{\textdollar}14,000 + \text{\textdollar}9,180 + \text{\textdollar}9,180 = \text{\textdollar}32,360$.
4. IRC § 6672 Trust Fund Portion: If the LLC's managing member diverts the payroll tax account to pay a supplier, the personal 100% Trust Fund Recovery Penalty equals the withheld employee taxes: $\text{\textdollar}14,000 \text{ (Income Tax)} + \text{\textdollar}9,180 \text{ (Employee FICA)} = \text{\textdollar}23,180$.
5. Q1 Net FUTA Liability: Each of the 10 carpenters exceeded the $7,000 annual FUTA wage cap during Q1, so Q1 net FUTA is $10 \times \text{\textdollar}7,000 \times 0.6\% = \text{\textdollar}420.00$. Because $420.00 is $500 or less, Cumberland Commercial Builders does not have to make a Q1 FUTA deposit on April 30 and carries the $420.00 forward to Q2.

For 2026, the Social Security taxable wage base is $184,500. The 6.2% employee and employer shares stop at that annual base; Medicare’s 1.45% shares do not. The employer begins withholding the employee-only 0.9% Additional Medicare Tax above $200,000 of wages paid to that employee, while the employee’s ultimate tax threshold depends on filing status. Statutory due dates falling on weekends or legal holidays generally move to the next business day. Obtain Form W-4 before processing pay; do not confuse an onboarding best practice with an absolute statutory first-day filing rule.

Source check (October 13, 2026): IRS Publication 15 (2026).