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Payroll taxes
The income-tax withholdings and Social Security and Medicare contributions taken from each paycheck, plus the employer's own matching and unemployment taxes — money you hold on behalf of employees and the government, record as a liability, and remit on a schedule rather than keep as income.
Last reviewed October 2026
Why it matters
The payroll tax path
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An illustrative $3,180.00 of payroll tax is withheld and accrued from a payroll run, held on the balance sheet as a payroll liability, deposited via EFTPS, and then reconciled to the filed Form 941 — out by 0.00. The same held amount travels the whole path; it is never income.
Payroll taxes are money a business holds for the government, not income: the amounts withheld from each paycheck are held on employees' behalf for the IRS and the state, and the deposit deadlines are not negotiable.
When a paycheck is cut, part of the employee's gross pay is withheld and part is contributed by the employer — and until those amounts leave your bank on their scheduled deposit date, they sit in your account looking like cash you have. They are not. They are held funds owed to the IRS and, in most states, to a state agency. If the books record them as ordinary expenses, or miss the deposit, or double-count a paycheck, the balance sheet lies about how much of that cash you can actually spend. Reconciling payroll to what was truly withheld, held, deposited, and filed is what keeps that lie from compounding quarter over quarter.
2026 federal payroll tax rates
For wages paid in 2026, IRS Publication 15 (2026) sets these federal rates (checked October 2026):
- Social Security: 6.2% from the employee and 6.2% from the employer, on wages up to the 2026 wage base of $184,500.
- Medicare: 1.45% from each side, with no wage cap. Together with Social Security that is 15.3% of covered wages, split evenly between employee and employer.
- Additional Medicare Tax: 0.9% withheld from the employee on wages over $200,000 in the calendar year. Publication 15 is explicit that there is no employer share.
- Federal unemployment (FUTA): 6.0% on the first $7,000 of each employee's wages, paid by the employer only. The credit for state unemployment tax can be as much as 5.4%, which brings the net rate to 0.6% when the full credit applies.
- State unemployment and state income tax: set by each state, with rates and wage bases that differ by state and, for unemployment tax, often by employer.
QuickBooks Payroll applies these through its tax tables. The bookkeeping job is to make sure what it calculated is what landed in the liability accounts — and that every deposit was applied against the right one.
Employer taxes versus employee taxes
Payroll taxes split into two piles: taxes withheld from the employee's pay, which are never your expense, and taxes the employer owes on top of wages, which are a real cost of employing people.
The employee's pile — federal income tax withholding, the employee share of Social Security, and the employee share of Medicare — is subtracted from gross pay, so it never touches your profit and loss as an expense. The employer's pile — a matching share of Social Security and Medicare, plus federal unemployment tax (FUTA) and, in nearly every state, state unemployment tax (SUTA) — is a real cost of employing people and does hit your expenses. Getting this split right in the books is the difference between a payroll expense that reflects the true cost of labor and one that is silently inflated or understated. The rates, wage bases, and thresholds that govern each of these are set by the IRS and the states, not by us, and they change; the authoritative federal reference is IRS Publication 15 (Circular E), the Employer's Tax Guide.
- Withheld from the employee: federal income tax, the employee's 6.2% Social Security and 1.45% Medicare, the 0.9% Additional Medicare Tax on wages over $200,000, and state or local income tax where the state or city levies one. These reduce take-home pay; in the books they are liabilities, never your expense.
- Paid by the employer on top of wages: the matching 6.2% Social Security and 1.45% Medicare, FUTA, and state unemployment tax. These are payroll tax expense, and they are liabilities too until they are deposited.
Withholding — money you hold, not money you own
Withholding turns a portion of every paycheck into a debt the moment payroll is calculated: the withheld amounts are the employee's taxes, held briefly by the business on their way to the IRS — never yours to spend.
When payroll software computes an employee's federal income tax, Social Security, and Medicare, it reduces their take-home pay by those amounts — but the cash does not disappear and it is not yours to spend. It stays in your bank until the deposit date, at which point it moves to the IRS. The whole point of the payroll tax system is that employers act as collection agents: you hold employees' tax money briefly and pass it through. This is why the single most damaging payroll mistake is treating that held cash as available operating funds. A business can look solvent right up until a deposit clears and reveals that the "cash" was always spoken for. Correctly, withholding is booked as a liability at the moment payroll is run, and the liability is only relieved when the deposit is made.
Payroll tax liabilities in QuickBooks
In QuickBooks, payroll taxes live on the balance sheet as payroll liability balances, and they should rise with each pay run and fall with each deposit.
When you run payroll through QuickBooks Payroll, the software posts the withheld and accrued taxes to payroll liability accounts automatically; you then pay them down through the payroll tax workflow — in QuickBooks Online under Taxes, and in QuickBooks Desktop through the Payroll Center's Pay Liabilities tab (exact menu names vary by version and plan; see Intuit's official help for your version). The rule that keeps the balances honest is simple: never record a tax deposit as a plain expense or a check written to the IRS, because that leaves the original liability sitting on the books forever while double-counting the cost. Deposits must be applied against the liability the payroll run created. When they are, the payroll liability balance at any date tells you exactly how much tax you have withheld and accrued but not yet remitted — which is the number that should agree with your next filing.
QuickBooks Online Payroll adds one more account to read. Intuit explains that when payroll tax is withdrawn from your bank, the bank balance falls and a tax holding account rises, and the liability itself only falls when the agency is paid (Intuit: understand payroll tax accounting in QuickBooks, checked October 2026). A balance in the holding account between the withdrawal and the payment is expected; one that never clears is worth a question.
Deposits, Form 941, and Form 940
Payroll tax deposits and payroll tax returns are two different acts on two different clocks: deposits send the money on the schedule the IRS assigns, while Form 941 (quarterly) and Form 940 (annual) report the totals.
The books have to track both. Federal payroll tax deposits are made electronically, generally through the Electronic Federal Tax Payment System (EFTPS), on a schedule the IRS assigns; then, separately, the totals are reported on a return. The quarterly return is Form 941, which reports wages, withheld federal income tax, and Social Security and Medicare for the quarter and reconciles them against the deposits made. The annual federal unemployment return is Form 940, which covers FUTA — an employer-only tax on a limited base of wages. The honest division of labor here matters: your payroll provider or CPA calculates, deposits, and files these returns — that is their responsibility and their liability, and we do not step into it. What we do is make the books tie out to their work. Every wage, tax, and deposit for the quarter recorded in QuickBooks should reconcile to the amounts on the filed 941, so that the return and the ledger tell the same story. When they diverge, something was mis-booked, and that gap is what a cleanup closes.
Deposit schedules and return due dates
The schedule itself follows rules in Publication 15. For 2026, an employer that reported $50,000 or less of employment taxes in its lookback period — July 2024 through June 2025 for a Form 941 filer — is a monthly depositor and deposits each month's taxes by the 15th of the following month. Above $50,000 it is a semiweekly depositor: taxes on wages paid Wednesday, Thursday or Friday are due the following Wednesday, and on wages paid Saturday through Tuesday the following Friday. On any day the accumulated tax reaches $100,000 or more, it is due by the next business day. An employer whose tax for the current or the prior quarter is under $2,500, and that hasn't triggered the $100,000 rule, may pay with a timely filed return instead. Every federal deposit must be made by electronic funds transfer — EFTPS, IRS Direct Pay, or the IRS business tax account.
The returns run on fixed dates. Form 941 is due by April 30, July 31, October 31 and January 31; Form 940 is due January 31, and under Publication 15's rule a due date that falls on a Saturday, Sunday or legal holiday moves to the next business day — which is why the 2025 Form 940 was due February 2, 2026. Forms W-2 go to employees, and Copy A goes to the Social Security Administration with Form W-3, by February 1, 2027 for 2026 wages (IRS: General Instructions for Forms W-2 and W-3 (2026), checked October 2026). States run their own withholding and unemployment returns on their own calendars, and each of those returns should tie to its own state liability account in the books.
When payroll liabilities won't clear in QuickBooks
A liability that never falls is almost always a recording problem, and Intuit's own troubleshooting points at the same few causes. The steps below are for QuickBooks Desktop Payroll, from Intuit's help on liability discrepancies and adjustments (checked October 2026). Back up the company file before you change anything.
- Compare the liability report with the balance sheet. Run Reports → Employees & Payroll → Payroll Liability Balances for the period and set it beside the payroll liability accounts on the balance sheet. In QuickBooks Online, payroll reports are under Reports → Standard reports, in the Payroll section. A balance that doesn't fall after a deposit points straight to the next step.
- Find tax payments made with Write Checks or Pay Bills. Intuit is blunt: “QuickBooks only recognizes that a liability is paid if a liability check is created” (Intuit: fix a discrepancy on the Payroll Liability Balances report). Open the bank register (Banking → Use Register), note the regular check's date, amount and number, delete it, and re-record it through Employees → Payroll Center → Pay Liabilities with Create Custom Payments, keeping the original check number and date so the bank still reconciles.
- Check where each payroll item posts. Run Reports → Employees & Payroll → Payroll Item Listing and confirm every tax item posts to a liability account. An item pointed at the wrong account never shows as paid against the right line.
- Look for voided paychecks and voided liability checks. Intuit notes that a paycheck voided after its liability was paid leaves a negative balance on the Payroll Liability Balances report, and a voided liability check leaves a positive one. The fix is to recreate the transaction; a voided paycheck in a prior quarter or year means amended returns, which is your payroll provider's call.
- Adjust only what is genuinely wrong. For a balance that is wrong at the payroll-item level, use Employees → Payroll Taxes and Liabilities → Adjust Payroll Liabilities: set the Date and Effective Date to the last paycheck date of the affected period, choose Employee Adjustment and the employee, pick the item and enter the amount, and decide under Accounts Affected whether the change posts to the liability and expense accounts (Intuit: adjust payroll liabilities in QuickBooks Desktop Payroll). Intuit's Assisted Payroll customers contact Intuit for anything touching a filed form or payment.
- Rerun the reports. Run the payroll summary and the Payroll Liability Balances report again and confirm the amounts left are the ones genuinely still due.
- Stop at a filed quarter. If a fix would change wages or taxes in a quarter whose Form 941 is already filed, the books must be corrected to match the return — or the return amended by whoever files it. That is the point to bring in your payroll provider or CPA, and a payroll cleanup if the history needs rebuilding.
We don't run or file payroll; this is how payroll someone else runs gets recorded correctly. How QuickBooks Payroll itself fits around that work is covered on our QuickBooks Payroll page, and a free QuickBooks review checks whether your payroll liabilities tie to the returns already filed.
Common mistakes
Most payroll tax problems in the books trace to a handful of repeatable errors: deposits booked as expenses, paychecks that bypass the payroll items, taxes in the wrong period, edits to filed quarters, and misassigned bank-feed matches.
Knowing them shortens every cleanup. Tax deposits get entered as ordinary expenses or as checks to the IRS instead of being applied against the payroll liability, so the liability never clears and the expense is counted twice. Manual paychecks or journal entries bypass the payroll items entirely, so the tax subtotals that a return relies on are never built. Taxes land in the wrong period because a deposit dated in a new quarter is applied to the old one, or vice versa, quietly breaking the reconciliation to both quarters' 941s. Prior-period corrections get made directly in a quarter that has already been filed, so the books no longer match a return that cannot be changed without an amendment. And bank feeds match a deposit to the wrong account, hiding the whole event from the payroll liability workflow. None of these are exotic — they are the ordinary friction of running payroll — but left unreconciled they accumulate into a balance sheet nobody trusts.
How this connects to cleanup
Payroll tax cleanup is reconciliation applied to the payroll liabilities: proving that what was withheld, held, deposited, and filed all agree.
It follows the same disciplined sequence we use everywhere — see our method — starting from the filed returns as fixed reference points and correcting the books to match them without disturbing a quarter that has already been reported. Below are the two most common ways this shows up.
- QuickBooks payroll cleanupPayroll liabilities that don't tie to the filed 941 are the reason payroll cleanup exists. We reconcile the books to what your provider actually filed.See the service
- Problem: my payroll liabilities won't clearA liability balance that never falls is almost always a deposit booked as an expense instead of applied against the tax it paid.
Questions about payroll taxes
Who actually files the payroll tax returns — you or us?
Your payroll provider or CPA files the returns and makes the tax deposits; that is their lane, and we do not replace them. Our work is inside the books: we make sure every paycheck, tax, and deposit is recorded correctly so the payroll liability balances agree with what your provider actually filed on the 941.
Why do payroll taxes show up as a liability and not an expense?
Because the withheld portion was never your money. Income tax, Social Security, and Medicare taken from an employee's gross pay are held on their behalf until you remit them, so they sit on the balance sheet as a payroll liability. Only the employer's own share of the taxes is an expense to your business.
What is Form 941 and how does it relate to my books?
Form 941 is the quarterly federal return that reports wages, withheld income tax, and Social Security and Medicare for the quarter. Your books should reconcile to it line by line: the wages, withholdings, and deposits recorded in QuickBooks for the quarter should match the amounts your provider reported on the filed 941.
What is Form 940, and is it the same thing?
No. Form 941 is filed quarterly for income-tax withholding and Social Security and Medicare; Form 940 is filed annually for federal unemployment tax (FUTA), which is an employer-only tax. They are separate returns with separate schedules, and both should reconcile to the corresponding liabilities in your books.
Do you set tax rates or calculate withholding for us?
No. Withholding rates, wage bases, and deposit thresholds are set by the IRS and change over time — see IRS Publication 15 (Circular E) for the current figures. Your payroll software calculates them. We verify that what the software calculated and what was deposited is recorded correctly and reconciles to the filings.
My payroll liabilities balance looks wrong. What causes that?
The most common causes are deposits entered as ordinary expenses instead of applied against the liability, taxes recorded in the wrong period, duplicate paychecks, or manual journal entries that bypass the payroll items. Isolating which one — and correcting it without disturbing a filed quarter — is exactly the kind of triage a cleanup does first.
What are the 2026 federal payroll tax rates?
Under IRS Publication 15 for 2026: Social Security is 6.2% each for the employee and the employer on wages up to $184,500; Medicare is 1.45% each with no wage cap; an extra 0.9% Additional Medicare Tax is withheld from the employee on wages over $200,000; and FUTA is 6.0% on the first $7,000 of each employee's wages, paid by the employer and reduced by a credit of up to 5.4% for state unemployment tax.
Which payroll taxes does the employer pay, and which are withheld?
Withheld from the employee: federal income tax, the employee's 6.2% Social Security and 1.45% Medicare, any Additional Medicare Tax, and state or local income tax where it applies. Paid by the employer: the matching 6.2% and 1.45%, FUTA, and state unemployment tax. Only the employer's share is a payroll tax expense; the withheld amounts reduce take-home pay.
How often do I have to deposit payroll taxes?
Monthly or semiweekly, depending on the taxes you reported in the lookback period. For 2026, $50,000 or less makes you a monthly depositor, with each month's taxes due by the 15th of the following month; more than that makes you a semiweekly depositor. A day's accumulated liability of $100,000 or more is due by the next business day. Every federal deposit is made electronically, for example through EFTPS.
When are Form 941 and Form 940 due?
Form 941 is due by April 30, July 31, October 31 and January 31 for the quarter just ended. Form 940 is due January 31 for the prior year, moving to the next business day when that date falls on a weekend or holiday. Forms W-2 and W-3 for 2026 wages are due February 1, 2027.
How do I adjust payroll liabilities in QuickBooks Desktop?
Go to Employees, Payroll Taxes and Liabilities, Adjust Payroll Liabilities. Date the adjustment and its effective date to the last paycheck of the affected period, choose the employee and the payroll item, enter the amount, and decide under Accounts Affected whether it posts to the books. Fix the cause first, such as a tax payment made with Write Checks, or the adjustment only hides it.
- QuickBooks cleanup— when payroll liabilities won't tie to the filed returns
- Merchant fees— the other recurring cost that is easy to record wrong