Payroll Cost Terms, Explained (2026)

Quick answer

As an employer, you are responsible for four core payroll taxes: federal income tax withholding, Social Security and Medicare taxes, federal unemployment (FUTA) tax, and your state's unemployment insurance tax. Depending on where the business operates, state and local income tax withholding can apply as well. Only part of this is a true cost to the business. The withheld amounts are the employee's money passing through you, while the employer share of Social Security and Medicare, FUTA, and state unemployment are paid by the business on top of wages. The IRS publishes current federal rates and deposit rules each year in Publication 15 (Circular E), the Employer's Tax Guide, and that is the place to check them rather than a figure copied from another site.

The payroll tax terms, one by one

The IRS's Hiring Employees guidance sets out the federal obligations that arrive with a first employee, and Publication 15 carries the detail. Each term below is either a line item in the true cost of an employee or a liability you hold on the employee's behalf. Rates are left out on purpose. They change, and the official figure is the only one worth using.

Federal income tax withholding

This is income tax you take out of each paycheck and send to the IRS on the employee's behalf. The amount depends on the employee's Form W-4. The IRS says to ask all new employees for a signed W-4 when they start work and to make it effective with the first wage payment.

A W-4 stays in effect until the employee gives you a new one. When a replacement arrives, the IRS says the new withholding must begin no later than the start of the first payroll period ending on or after the 30th day from the date you received it. Cost to the business: nothing in dollars, but withholding and depositing it correctly is your responsibility.

Social Security and Medicare taxes (FICA)

These are often grouped as FICA taxes, and they come in two halves. You withhold the employee's share from wages and pay a matching employer share from the business's own funds. That employer half is a real cost attached to wages, and the current rates are in Publication 15.

Federal unemployment tax (FUTA)

FUTA is paid by the employer alone and is never withheld from an employee's pay. It funds the federal side of the unemployment insurance system, and what you owe is connected to what you pay into your state's program. Publication 15 explains how the two interact and when FUTA is due.

State unemployment insurance (SUI)

Each state runs its own unemployment insurance program and sets the rate a business pays. Rates are decided at the state level, so a figure for a business in one state says nothing about a business in another. Your state's labor or workforce agency is the authority on this line.

State and local income tax withholding

Many states, and some cities and counties, also require income tax to be withheld from wages. The U.S. Small Business Administration's guidance on hiring and managing employees treats federal and state tax obligations as part of the same setup job. Like federal withholding, this is the employee's money rather than a business cost, but collecting and remitting it is your responsibility.

Workers' compensation

Workers' compensation insurance is not a tax, but it sits on the same cost line as payroll taxes when you budget for an employee. Whether a business needs it, where it is bought and what it costs are all set by state law, and the rules differ sharply from state to state. Check with your state rather than assuming a rule from somewhere else.

Which payroll taxes cost the business money, and which pass through?

The true cost of an employee is gross wages plus the employer share of Social Security and Medicare, FUTA, state unemployment, any required workers' compensation, and whatever you pay a service to run it all. The withheld amounts don't add to that cost, but they are not the business's money to spend either. Keeping payroll funds in a separate business account makes that line far easier to hold. The IRS's Publication 583 lists opening a business checking account among the first things to do when starting a business.

Why the EIN comes before any payroll tax

Every tax in this glossary is withheld, deposited and reported under the business's EIN. The employer for tax purposes is the business, so without an EIN there is nothing to run payroll under. The IRS issues EINs directly and free of charge through its Get an Employer Identification Number page. Reporting also depends on employee details: the IRS says you need each employee's name and Social Security number to enter on Form W-2.

For a business that isn't formed yet, or is formed but has no EIN, the order that matters is entity, EIN, a separate bank account, then payroll. ZenBusiness covers the entity and the EIN and points the payroll step to a partner. Its ADP payroll partnership page states that you can't run payroll without an EIN, and it routes customers who are ready to hire to RUN Powered by ADP. That is a separate service with its own platform, billing and support, not payroll inside ZenBusiness.

Employee or contractor? Why the label doesn't decide it

The cost difference is the reason this question matters. A contractor triggers no withholding, no employer share of Social Security and Medicare, and no FUTA, which makes the label tempting. The IRS does not go by the label or the contract, though. It weighs three categories of evidence: behavioral control, financial control, and the type of relationship between the parties.

No single test settles it. In the IRS's words, "There is no 'magic' or set number of factors that 'makes' the worker an employee or an independent contractor and no one factor stands alone in making this determination." An employer who classifies an employee as a contractor without a reasonable basis may be held liable for employment taxes for that worker.

If the answer is genuinely unclear, Form SS-8 asks the IRS to make the determination. Plan around the wait: the IRS says it may take at least six months to receive a determination.

S corporation owners and the reasonable wage

Owners of an S corporation who work in the business face a specific version of the cost question. Wages carry employment taxes and non-wage distributions do not, which is exactly why the IRS watches the split. The rule is that "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made."

The IRS also has the authority to reclassify payments made to shareholders from distributions to wages. If you run an S corporation and pay yourself mostly through distributions, that reclassification would bring the employment taxes back, so the reasonable wage belongs in the payroll budget from the start.

Pay frequency and how long to keep payroll records

How often employees must be paid is set by state law, and it varies widely. The U.S. Department of Labor's summary of state payday requirements shows the range: California requires wages at least twice per calendar month on days designated in advance, Colorado requires monthly payment, and Connecticut requires weekly payment unless the labor commissioner approves a longer interval. The DOL itself says to consult the relevant state labor office for official information.

Records are a federal matter under the Fair Labor Standards Act. The Department of Labor's recordkeeping fact sheet says payroll records must be kept for three years. The records that wage computations are based on, including time cards and wage rate tables, must be kept for two years.

What does a payroll service add to the cost?

The providers below are listed alphabetically, not ranked. Prices were checked at each provider's own pricing page as of October 6, 2026, and they can change. Most use a monthly base fee plus a per-person fee, so the total rises with every hire.

ADP

ADP does not publish payroll pricing and quotes each business individually. That is the whole answer on price: there is no public figure to report, and any page that gives one is guessing. For small employers, ADP's offering is RUN Powered by ADP, built for businesses with 1 to 49 employees.

Gusto

Gusto publishes three tiers: Simple at $49 a month plus $6 per person, Plus at $80 a month plus $12 per person, and Premium at $180 a month plus $22 per person. The per-person fee is what moves the total as a team grows, so the gap between tiers widens with each hire.

OnPay

OnPay charges $49 a month plus $6 per worker, and its public pricing page quotes a starting price of $55 a month. With one base fee and one per-worker fee, it is among the easiest totals on this list to forecast.

Patriot Software

Patriot Software has the lowest published entry point here. Basic Payroll is $17 a month plus $4 per employee, and Full Service is $37 a month plus $5 per employee. Compare what each tier includes before choosing on price alone.

QuickBooks Payroll

QuickBooks Payroll is sold bundled with QuickBooks accounting. The ongoing prices are Workforce Payroll with Simple Start at $88 a month plus $6.50 per employee, with Essentials at $125 a month plus $6.50 per employee, and Workforce Premium with Plus at $203 a month plus $10 per employee. At the time of writing there is also a promotional rate of 50% off the base fee for three months, which is a first-term discount and not the ongoing price.

SurePayroll

SurePayroll starts at $29 a month plus $7 per worker. A multi-state add-on costs $9.99 a month, which matters if staff work in more than one state, and household payroll starts at $39 a month.

ZenBusiness

ZenBusiness does not run payroll and does not compete with the tools above on that. What it sells is the setup and upkeep around payroll: formation on Starter at $0 plus state fees, Pro at $199 a year, or Premium at $299 a year, with Pro and Premium renewing at those annual prices. The EIN is included from Pro up and costs $99 on Starter. A registered agent is $199 a year, Money Pro bookkeeping is $30 a month, and a website is $129 a year; state fees are set by the state and are separate from all of these.

Payroll itself goes through ADP. A ZenBusiness customer requests the connection from the ZenBusiness dashboard, an ADP representative follows up about employee count and pay schedule, and ADP quotes. Payroll then runs in ADP's own system with ADP's billing and support, and no ZenBusiness plan price includes it. Customers may be eligible for promotional ADP pricing, which is confirmed in that consultation and is not guaranteed.

Published prices side by side

Which route fits which situation?

If the business has no EIN yet, payroll software is the second decision, not the first. That reader is best served starting with ZenBusiness: form the entity, get the EIN included or at $99, and request the ADP connection when the first hire is close. Payroll then runs through ADP as a separate service with its own platform, billing and support, quoted by ADP per business and not included in any ZenBusiness plan price.

If the business is already formed with an EIN and the only goal is the lowest published monthly bill, Patriot Software's Basic tier is the cheapest figure here. Everyone in between is weighing base fees against per-person fees, and the right answer depends on headcount.

This article is general information, not legal, tax or accounting advice, and payroll requirements vary by state and change over time.