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Desk
Payroll
Factors in establishing who you should take out payroll taxes on.

An employee works under a company's control, getting regular pay, benefits, and a W-2 form, with taxes withheld by the employer, while an independent contractor operates their own business, controls how they work, uses their own tools, handles their own taxes (paying self-employment tax), and receives 1099 forms, generally hired for specific projects with no benefits like insurance or paid time off. Key differences center on control, financial aspects (taxes, tools, pay), and benefits/protections, with employees integrated into the business and contractors offering a separate service. 

Employee

  • Control: Employer dictates what, when, and how work is done.

  • Taxes: Employer withholds income, Social Security, and Medicare taxes; pays employer share

  • Pay: Regular wages, salaried or hourly.

  • Tools: Employer usually provides them.

  • Benefits: Eligible for benefits like insurance, paid vacation, retirement.

  • Legal Protections: Covered by labor laws (minimum wage, overtime).

  • Tax Form: W-2.

Independent Contractor (IC)

  • Control: Worker controls how the work is done, only the result matters to the client.

  • Taxes: Responsible for paying their own income and self-employment taxes (quarterly).

  • Pay: Paid per project, by invoice, or contract.

  • Tools: Uses own equipment and resources.

  • Benefits: Not eligible for client's benefits.

  • Legal Protections: Not covered by FLSA and other employment laws.

  • Tax Form: 1099.

  • Filing unemployment taxes for your employees involves both federal (FUTA) and state unemployment taxes (SUTA), which are paid solely by the employer in most states. These taxes are not withheld from employee wages. 

    Federal Unemployment Tax (FUTA)

    The Federal Unemployment Tax Act (FUTA) helps fund state unemployment programs. 

    • Liability: You are generally liable for FUTA tax if you paid wages of $1,500 or more in any calendar quarter or had at least one employee for some part of a day in 20 or more different weeks during the calendar year.

    • Rate and Wage Base: The FUTA tax rate is 6.0% on the first $7,000 in wages paid to each employee annually.

    • Credit for State Taxes: You can generally claim a credit of up to 5.4% for the state unemployment taxes you pay on time, reducing your net FUTA tax rate to 0.6%. This credit may be reduced if your state has outstanding federal loans for unemployment benefits (a "credit reduction state").

    • Reporting and Payment:

      • Use Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, to report your annual FUTA tax.

      • File Form 940 by January 31 of the following year (e.g., January 31, 2026, for 2025 taxes).

      • Deposits are required quarterly if your FUTA tax liability exceeds $500 in a quarter. Deposits must be made by the last day of the first month following the end of the quarter (e.g., April 30, July 31, October 31, and January 31).

      • Federal tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS). 

    State Unemployment Tax (SUTA)

    State unemployment tax rules and rates vary by location. In most states, only the employer pays SUTA tax (Alaska, New Jersey, and Pennsylvania are exceptions where employees also contribute). 

    • Registration: You must register with your state's workforce agency or Division of Employment Security (DES) to receive an employer ID number and your specific tax rate. North Carolina employers can manage this through the NCSUITS system.

    • Rate and Wage Base: Your assigned SUTA tax rate depends on an experience-rating system (based on the number of unemployment claims filed by former employees), and each state sets its own taxable wage base.

    • Reporting and Payment: SUTA taxes are typically reported and paid on a quarterly basis to the state agency.

      • In North Carolina, employers file a Quarterly Tax and Wage Report (Form NCUI101) online. 

    General Guidance

    • Penalties: Failing to deposit and report employment taxes on time can result in significant monetary penalties and interest charges.

    • Professional Help: Using a payroll service provider or a tax professional can help ensure accuracy and compliance with all federal and state requirements. 

  • What's New FORM 941
    Social security and Medicare taxes for 2025.

    The social security tax rate is 6.2% each for the employee and employer. The social security wage base limit is $176,100. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2024. There is no wage base limit for Medicare tax. Social security and Medicare taxes apply to the wages of household workers you pay $2,800 or more in cash wages in 2025. Social security and Medicare taxes apply to election workers who are paid $2,400 or more in cash or an equivalent form of compensation in 2025.

     

    Electronic filing of Form 941-X.

    You can now file Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, electronically using Modernized e-File (MeF). For more information on electronic filing, go to IRS.gov/EmploymentEfile.

    What if You Reorganize or Close Your Business?
    If You Sell or Transfer Your Business

    - If you sell or transfer your business during the quarter, you and the new owner must each file a Form 941 for the quarter in which the transfer occurred. Report only the wages you paid.
    - When two businesses merge, the continuing firm must file a return for the quarter in which the change took place and the other firm should file a final return.
    - Changing from one form of business to another—such as from a sole proprietorship to a partnership or corporation—is considered a transfer. If a transfer occurs, you may need a new EIN. See Pub. 1635 and section 1 of Pub. 15 for more information.
    - Attach a statement to your return with:

    • The new owner's name (or the new name of the business);

    • Whether the business is now a sole proprietorship, partnership, or corporation;

    • The kind of change that occurred (a sale or transfer);

    • The date of the change; and The name of the person keeping the payroll records and the address where those records will be kept.

    If Your Business Has Closed

    If you permanently go out of business or stop paying wages to your employees, you must file a final return. To tell the IRS that Form 941 for a particular quarter is your final return, check the box on line 17 and enter the final date you paid wages. Also attach a statement to your return showing the name of the person keeping the payroll records and the address where those records will be kept.
    See Terminating a business in the General Instructions for Forms W-2 and W-3 for information about earlier dates for the expedited furnishing and filing of Forms W-2 when a final Form 941 is filed.
    If you participated in a statutory merger or consolidation, or qualify for predecessor-successor status due to an acquisition, you should generally file Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. See the Instructions for Schedule D (Form 941) to determine whether you should file Schedule D (Form 941) and when you should file it.

    When Must You File?

    File your initial Form 941 for the quarter in which you first paid wages that are subject to social security and Medicare taxes or subject to federal income tax withholding. See the table titled When To File Form 941, later.

    Then, you must file for every quarter after that—every 3 months—even if you have no taxes to report, unless you’re a seasonal employer or are filing your final return. See Seasonal employers and If Your Business Has Closed, earlier.

    What’s the Purpose of Form 940?

    Use Form 940 to report your annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only employers pay FUTA tax. Don’t collect or deduct FUTA tax from your employees’ wages.
    The FUTA tax applies to the first $7,000 you pay to each employee during a calendar year after subtracting any payments exempt from FUTA tax.

    Who Must File Form 940?

    Except as noted below, if you answer “Yes” to either one of these questions, you must file Form 940.

    • Did you pay wages of $1,500 or more to employees in any calendar quarter during 2024 or 2025?

    • Did you have one or more employees for at least some part of a day in any 20 or more different weeks in 2024 or 20 or more different weeks in 2025? Count all full-time, part-time, and temporary employees. However, if your business is a partnership, don’t count its partners.

     

    If your business was sold or transferred during the year, each employer who answered “Yes” to at least one question above must file Form 940. However, don’t include any wages paid by the predecessor employer on your Form 940 unless you’re a successor employer. For details, see Successor employer under Type of Return, later.

     

    If you’re not liable for FUTA tax for 2025 because you made no payments to employees in 2025, check box c in the top right corner of the form. Then, go to Part 7, sign the form, and file it with the IRS.

     

    If you won’t be liable for filing Form 940 in the future because your business has closed or because you stopped paying wages, check box d in the top right corner of the form. For more information, see Final: Business closed or stopped paying wages under Type of Return, later.

    For Employers of Household Employees

    If you’re a household employer, you must pay FUTA tax on wages that you paid to your household employees only if you paid cash wages of $1,000 or more in any calendar quarter in 2024 or 2025.

    A household employee performs household work in a:

    • Private home,

    • Local college club, or

    • Local chapter of a college fraternity or sorority.

    Generally, employers of household employees must file Schedule H (Form 1040) instead of Form 940.

    However, if you have other employees in addition to household employees, you can choose to include the FUTA taxes for your household employees on Form 940 instead of filing Schedule H (Form 1040). If you choose to include household employees on your Form 940, you must also file Form 941, Employer’s QUARTERLY Federal Tax Return; Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees; or Form 944, Employer’s ANNUAL Federal Tax Return, to report social security, Medicare, and any withheld federal income taxes for your household employees. See Pub. 926 for more information.

    For Agricultural Employers

    File Form 940 if you answer “Yes” to either of these questions.

    • Did you pay cash wages of $20,000 or more to farmworkers during any calendar quarter in 2024 or 2025?

    • Did you employ 10 or more farmworkers during some part of the day (whether or not at the same time) during any 20 or more different weeks in 2024 or 20 or more different weeks in 2025?

    Count wages you paid to aliens who were admitted to the United States on a temporary basis to perform farmwork (workers with H-2A visas). However, wages paid to H-2A visa workers aren’t subject to FUTA tax. See Pub. 15 for more information.

    For Indian Tribal Governments

    Services rendered by employees of a federally recognized Indian tribal government employer (including any subdivision, subsidiary, or business enterprise wholly owned by the tribe) are exempt from FUTA tax and no Form 940 is required. However, the tribe must have participated in the state unemployment system for the full year and be in compliance with applicable state unemployment law. For more information, see section 3309(d).

    For Tax-Exempt Organizations

    Religious, educational, scientific, charitable, and other organizations described in section 501(c)(3) and exempt from tax under section 501(a) generally aren’t subject to FUTA tax. However, a section 501(c)(3) organization is subject to FUTA tax when paying wages to employees on behalf of a non-section 501(c)(3) organization (for example, a section 501(c)(3) organization paying wages to employees of a related non-section 501(c)(3) organization, a section 501(c)(3) organization that is a section 3504 agent paying wages on behalf of a non-section 501(c)(3) organization, a section 501(c)(3) organization that is a common paymaster paying wages on behalf of a non-section 501(c)(3) organization, etc.).

    For State or Local Government Employers

    Services rendered by employees of a state, or a political subdivision or instrumentality of the state, are exempt from FUTA tax and no Form 940 is required.

    When Must You File Form 940?

    The due date for filing Form 940 for 2025 is February 2, 2026. However, if you deposited all your FUTA tax when it was due, you may file Form 940 by February 10, 2026.

    If we receive Form 940 after the due date, we will treat Form 940 as filed on time if the envelope containing Form 940 is properly addressed, contains sufficient postage, and is postmarked by the U.S. Postal Service (USPS) on or before the due date, or sent by an IRS-designated private delivery service (PDS) on or before the due date. However, if you don’t follow these guidelines, we will generally consider Form 940 filed when it is actually received. For more information about PDSs, see Where Do You File, later.

    If any due date for filing falls on a Saturday, Sunday, or legal holiday, you may file your return on the next business day.

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