Construction contractors who hire W-2 employees pay four employer-side payroll taxes — Social Security, Medicare, FUTA, and SUTA — and withhold two more from employee paychecks: federal and state income tax. Combined, employer-paid taxes add roughly 8–10% on top of gross wages, depending on the state and the employee’s earnings.
The Payroll Taxes at a Glance (2026)
| Tax | Rate | Who Pays | Wage Base / Limit |
|---|---|---|---|
| Social Security (employer) | 6.2% | Employer | First $184,500 per employee |
| Social Security (employee) | 6.2% | Employee (you withhold) | First $184,500 per employee |
| Medicare (employer) | 1.45% | Employer | All wages, no cap |
| Medicare (employee) | 1.45% | Employee (you withhold) | All wages, no cap |
| Additional Medicare Tax | 0.9% | Employee only (you withhold) | Wages over $200,000 |
| FUTA (federal unemployment) | 0.6% (after full 5.4% state credit) | Employer only | First $7,000 per employee |
| SUTA (state unemployment) | 0.1%–18%+ (varies by state and experience rating) | Employer only (except AK, NJ, PA, which also tax employees) | Varies by state — see table below |
| Federal income tax withholding | Varies (per employee’s W-4) | Employee (you withhold) | All wages |
| State income tax withholding | Varies by state (0%–13.3%) | Employee (you withhold) | All wages |
What you actually pay: For every $1,000 in wages, you owe $76.50 in FICA (Social Security + Medicare) until the employee crosses the $184,500 Social Security cap, plus up to $6 in FUTA on the first $7,000, plus SUTA at your state’s assigned rate.
Sources for federal figures: IRS Employment Tax Overview; SSA 2026 wage base announcement.
FICA: Social Security and Medicare
FICA is 15.3% combined — 7.65% paid by you, 7.65% withheld from the employee.
- Social Security (6.2% each): Applies only to the first $184,500 of wages per employee in 2026 (up from $176,100 in 2025). Once an employee crosses that amount, no further Social Security tax is owed for either side for the rest of the year.
- Medicare (1.45% each): Applies to all wages with no cap.
- Additional Medicare Tax (0.9%): Employee-only, withheld on wages above $200,000 in a calendar year. No employer match.
Example: An employee earns $200,000 in 2026. You owe 6.2% Social Security on the first $184,500 ($11,439) and 1.45% Medicare on all $200,000 ($2,900). Total employer FICA: $14,339. You withhold the matching employee-side amounts from their paychecks, plus 0.9% Additional Medicare Tax on the amount over $200,000.
FUTA: Federal Unemployment Tax
FUTA is 6.0% on the first $7,000 of each employee’s wages. Employers who pay SUTA on time get a 5.4% credit, bringing the effective rate down to 0.6% — a maximum of $42 per employee per year.
Credit reductions: States that borrow from the federal government to cover unemployment claims and don’t repay within the required window lose part of the 5.4% credit, which raises the effective FUTA rate for their employers. This list changes every year and is finalized by the Department of Labor after November 10.
As of the most recent finalized determination (for 2025), California and the U.S. Virgin Islands were subject to FUTA credit reductions (California’s effective rate rose to about 1.8% for 2025 due to years of outstanding loan balances). New York and Connecticut repaid their loans in 2025 and were removed from the list. Illinois is not currently on the list. The 2026 determination is published after November 10, 2026 — check the current DOL credit reduction list before filing Form 940 rather than relying on last year’s states.
Filing: Form 940 is due January 31 of the following year. Deposits are due quarterly if your liability exceeds $500 in a quarter.
SUTA: State Unemployment Tax — All 50 States (2026)
Every state runs its own unemployment insurance program with its own wage base and rate range. New employers in construction typically fall in the 1%–4% range, but many states assign construction a separate, higher starting rate than general business because of the industry’s seasonality and layoff frequency.
| State | 2026 Taxable Wage Base | New-Employer Rate (general, typical) |
|---|---|---|
| Alabama | $8,000 | 2.70% |
| Alaska | $54,200 | 1.00% (employee also contributes 0.50%) |
| Arizona | $8,000 | 2.00% |
| Arkansas | $7,000 (est.) | 2.00% |
| California | $7,000 | 3.40% |
| Colorado | $30,600 | ~3.05% |
| Connecticut | $27,000 | 1.90% |
| Delaware | $14,500 | 1.00% |
| District of Columbia | $9,000 | TBD |
| Florida | $7,000 | 2.70% |
| Georgia | $9,500 | 2.70% |
| Hawaii | $64,500 | 2.40% |
| Idaho | $58,300 | 1.00% |
| Illinois | $14,250 | 3.35% |
| Indiana | $9,500 | 2.50% |
| Iowa | $20,400 | 1.00% |
| Kansas | $15,100 | 1.75% |
| Kentucky | $12,000 | 2.70% |
| Louisiana | $7,000 | 0.09%–6.2% (by industry) |
| Maine | $12,000 | 2.54% |
| Maryland | $8,500 | 2.60% |
| Massachusetts | $15,000 | 2.42% |
| Michigan | $9,000 ($9,500 if delinquent) | 2.70% |
| Minnesota | $44,000 | 1.0%–8.9% + 0.4% base (by industry) |
| Mississippi | $14,000 | 1.00% |
| Missouri | $9,000 | 2.376% |
| Montana | $47,300 | 1.0%–2.0% (by industry) |
| Nebraska | $9,000 (up to $24,000 for max-rate employers) | 1.25% |
| Nevada | $43,700 | 2.95% |
| New Hampshire | $14,000 | 1.70% |
| New Jersey | $44,800 | 2.80% (employee also contributes ~0.38%) |
| New Mexico | $34,800 | 1.0%–1.19% (by industry) |
| New York | $17,600 | ~4.1% |
| North Carolina | $34,200 | 1.00% |
| North Dakota | $46,600 | 1.00% |
| Ohio | $9,000 | 2.85% (5.85% for new construction employers) |
| Oklahoma | $25,000 | 1.50% |
| Oregon | $56,700 | 2.40% |
| Pennsylvania | $10,000 | 3.822% for most employers; ~10.6% for new construction employers (employees also contribute 0.07%) |
| Rhode Island | $30,800 ($32,300 for max-rate employers) | 1.21% |
| South Carolina | $14,000 | 1.06% |
| South Dakota | $15,000 | 1.20% |
| Tennessee | $7,000–$9,000 (trust-fund dependent) | 2.70% |
| Texas | $9,000 | 2.7%, or the construction industry average if higher |
| Utah | $50,700 | 1.20% |
| Vermont | $15,400 | 1.00% |
| Virginia | $8,000 | 2.50% |
| Washington | $78,200 | 1.25%–8.15% (by industry) |
| West Virginia | $9,500 | 2.70% |
| Wisconsin | $14,000 | 3.05% |
| Wyoming | $33,800 | 1.69% |
Construction gets its own, higher new-employer rate in several states. This is worth budgeting for separately, since it’s easy to assume the “general” rate above applies to you. For example: Ohio assigns new construction employers 5.85% for 2026, more than double the 2.85% general new-employer rate. Pennsylvania assigns new construction employers roughly 10.6%, versus 3.822% for most other new businesses. Texas assigns new employers 2.7% or the average rate for their specific industry (construction included), whichever is higher, per the Texas Workforce Commission. Always check your state’s rate schedule under the correct NAICS/industry classification, not just the generic “new employer” line — the two can differ by several percentage points.
New-employer rates above are starting points only; your actual rate depends on your state’s construction/industry classification and, after a few years, your claims history (experience rating). Wage bases are indexed and change annually in most states; verify the current figure with your state workforce agency before running payroll. Sources: EY 2026 SUI wage base survey; state labor department sites.
Filing: Most states require quarterly wage/tax reports, due the last day of the month after the quarter ends (April 30, July 31, October 31, January 31).
Federal and State Income Tax Withholding
You withhold federal income tax based on each employee’s Form W-4 (using IRS Publication 15-T tables or payroll software). This money belongs to the employee — you’re collecting and remitting it, not paying it yourself.
Nine states have no income tax, so no state withholding applies to wages earned there: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Every other state requires withholding based on where the work is performed, not just where the employee lives.
Deposit withheld income tax along with FICA on your assigned schedule (monthly or semi-weekly, based on prior-year liability), and report it quarterly on Form 941.
Filing Deadlines and Forms
| Form | Reports | Frequency | Deadline |
|---|---|---|---|
| Form 941 | Quarterly wages, FICA, withheld income tax | Quarterly | April 30, July 31, October 31, January 31 |
| Form 940 | Annual FUTA return | Annual | January 31 |
| Form W-2 | Annual wage/tax statement (to employee and SSA) | Annual | January 31 |
| Form W-3 | Transmittal of W-2s to SSA | Annual | January 31 |
| Form 1099-NEC | Nonemployee compensation | Annual | January 31 |
| State unemployment return | Quarterly state wage/tax report | Quarterly | Varies — typically end of month following quarter |
2026 filing change: Under the One Big Beautiful Bill Act (OBBBA), the reporting threshold for Form 1099-NEC rises from $600 to $2,000 starting with 2026 payments (forms filed in early 2027). For 2025 payments filed in early 2026, the $600 threshold still applies. Confirm which threshold applies to the tax year you’re filing for.
Late-filing and late-deposit penalties: Failure to file Form 941/940 on time costs 5% of unpaid tax per month, up to 25%. Late deposits are penalized 2%–15% depending on how many days late. Late or incorrect W-2 and 1099-NEC forms carry tiered per-form penalties for 2026: $60 if corrected within 30 days, $130 if corrected by August 1, $340 after August 1 or if never filed, and $680 per form (or 10% of the reportable amount, if greater) for intentional disregard, with no cap on that top tier.
Worker Classification: Employee vs. Independent Contractor
The costliest payroll tax mistake in construction is treating a W-2 employee as a 1099 contractor. If you control how, when, and where the work gets done, that worker is legally an employee — regardless of what the contract calls them.
The federal standard is currently in flux. The Department of Labor’s 2024 rule applies a six-factor “totality of the circumstances” test with no factor weighted more than another:
- Opportunity for profit or loss — does the worker make business decisions (negotiating pay, hiring helpers, buying materials) that affect their own profit or loss?
- Investments by the worker — do they own their tools, equipment, and materials as a business investment, not just personal gear?
- Permanence of the relationship — is the work project-based with an end date, or ongoing and indefinite?
- Nature and degree of control — who sets the schedule, supervises the work, and makes hiring/firing calls?
- Integral to the business — is the work central to what your company does? A framer on a framing crew is integral; an accountant doing your books is not.
- Skill and initiative — is the worker building their own independent business, or relying on you for training and direction?
That said, DOL paused active enforcement of the six-factor rule in May 2025, and in February 2026 proposed a new rule that would rescind it and return to a simpler test centered on two “core” factors — control, and opportunity for profit or loss — closer to the framework used in 2021. That proposal is not yet final. Courts still apply the 2024 six-factor test in private wage lawsuits in the meantime. Document your classification decisions under the current six-factor framework, and check the DOL’s rulemaking page for the rule’s final status before treating this as settled.
Consequences of misclassification: the IRS can assess back FICA and FUTA for every period a worker was misclassified, plus penalties and interest, and you lose the 5.4% FUTA credit retroactively — pushing your FUTA rate from 0.6% up to 6.0% for those workers. State agencies can separately assess back unemployment tax — and, as covered below, misclassification surfaces again at your next workers’ compensation audit.
State ABC Tests (Stricter Than the Federal Standard)
Several states use an ABC test for unemployment insurance and wage-claim purposes, which presumes every worker is an employee unless the hiring business proves all three:
- A — Autonomy: the worker is free from your control and direction, in contract and in practice.
- B — Outside your business: the work performed falls outside your company’s usual business. This is where most construction contractors fail — a framing company hiring a framer is not “outside” the business, even if it’s called a sub-contract.
- C — Independent trade: the worker runs an independently established trade of the same nature — their own business entity, other clients, their own marketing.
States using an ABC or similarly strict test (2026): California, Massachusetts, New Jersey, Illinois, Vermont, and Washington. Even when the IRS accepts a 1099 classification federally, these states can still require unemployment tax on the same worker as an employee. Given the asymmetry — misclassifying a true contractor as an employee costs roughly 8% extra in payroll tax, while misclassifying an employee as a contractor can cost 50%+ in back taxes and penalties — default to W-2 whenever the classification is genuinely close.
Multi-State Payroll: Crews Working Across State Lines
If your crews work in more than one state, you generally withhold income tax and pay unemployment tax in the state where the work is performed, not where the employee lives or where your business is registered. Almost every state that has an income tax requires withholding on work performed within its borders, even for nonresidents.
Before work starts in a new state:
- Register for state withholding and unemployment insurance before the first day of work — several states penalize retroactive registration.
- Check for reciprocity agreements (e.g., Pennsylvania, New Jersey, Ohio, Indiana) that let an employee file a certificate so tax is withheld only in their home state.
- Watch for economic nexus thresholds — some states require unemployment registration once you cross a wage or workday threshold in-state, even without a physical office.
During the project:
- Track work location daily; compliance depends on where the work happened, not the employee’s home address.
- File new hire reports in each work state — federal deadline is 20 days, though some states require faster reporting.
- Split wages by state within a pay period if an employee worked in more than one.
After the project ends:
- Formally close withholding and unemployment accounts in states where work has ended, or you’ll keep owing “zero return” filings and penalties for not filing them.
- Keep registration dates, nexus determinations, and work-location logs for at least four years.
Taxable Fringe Benefits in Construction
Payroll taxes apply to more than the hourly rate. Common construction benefits are taxable unless they meet a specific IRS exclusion:
| Fringe Benefit | Taxable for Payroll Taxes? | Key Detail |
|---|---|---|
| Company vehicle (personal use) | Yes | Value calculated via IRS standard mileage or annual lease value method; only business use is excluded |
| Tool allowance (cash) | Yes | Taxable unless paid under an accountable plan (receipts required, excess returned) |
| Per diem above federal rate | Yes | Only the amount above IRS per diem rates for lodging/meals is taxable |
| Overnight travel lodging | No | Excludable for legitimate business travel away from the employee’s tax home |
| Safety gear and small tools | No | Excluded if required for the job and not suited to personal use |
| Company-logo uniforms | No | Excluded if not suitable for everyday wear and required as a job condition |
| Cell phone (business use) | No | Excluded if provided primarily for business purposes |
| Bonuses and cash awards | Yes | Fully taxable; non-cash awards under $1,600 may qualify for a de minimis or length-of-service exclusion |
Common mistake: paying tool allowances or vehicle reimbursements without an accountable plan. Without one — receipts required, excess returned within a reasonable time — the entire reimbursement becomes taxable wages subject to FICA and withholding. See IRS Publication 15-B.
Prevailing Wage (Davis-Bacon) Fringe Benefits: Cash vs. Bona Fide Plans
Contractors working federally funded or federally assisted public projects over $2,000 must pay the Davis-Bacon prevailing wage, which has two parts published on the project’s wage determination: a base hourly rate and a required fringe benefit rate. Many state and local prevailing wage laws mirror this structure. How you pay the fringe portion has a direct, and often overlooked, effect on your payroll tax bill.
You can satisfy the fringe requirement three ways:
- Pay it as cash added straight to the hourly wage.
- Contribute it to a bona fide benefit plan — health insurance, pension, life insurance, vacation, or an apprenticeship program that meets DOL’s “bona fide” criteria (irrevocable contributions, third-party administration).
- Split it between cash and a bona fide plan.
The tax difference is significant. Cash fringe payments are treated as ordinary wages and are subject to FICA, FUTA, and SUTA — the full 8–10% employer tax load applies on top of them, and they also increase the wage base your workers’ comp premium is calculated on. Contributions to a qualifying bona fide plan are generally excluded from all of that. Per DOL guidance, payments required by law — Social Security, unemployment tax, and workers’ compensation contributions — never count toward meeting the fringe obligation itself; only genuine benefit contributions or cash count.
In practice: paying the entire fringe rate as cash is the simplest option to administer, but it is also the most expensive one, since it forgoes the payroll-tax and workers’-comp savings a bona fide plan provides — savings that can be worth several percentage points of total project labor cost on a sizeable prevailing-wage job. Source: DOL Davis-Bacon fringe benefits FAQ.
Union dues on the paycheck: for union contractors, dues are withheld as a post-tax deduction — they come out of net pay after FICA and income tax are calculated, not before, and they don’t reduce taxable wages. Note also that the One Big Beautiful Bill Act (OBBBA) made permanent the suspension of the miscellaneous itemized deduction that used to let some employees deduct union dues on their personal returns, so as of 2026 there’s no federal deduction available for the employee side either.
How Payroll Tax Data Feeds Your Workers’ Comp Audit
Workers’ compensation is a separate line item from the payroll taxes above — but the two are not independent in practice. Every workers’ comp policy ends with a premium audit, and that audit is built directly on the same payroll records you use for tax filing.
Auditors reconcile your reported payroll, broken out by classification code, against your quarterly Form 941 filings and your state unemployment (SUTA) returns. If your internal payroll register shows one number but your 941s and SUTA filings add up to more, the auditor uses the higher figure. The same reconciliation catches worker misclassification: auditors review every 1099-NEC you issued and require a certificate of insurance for each subcontractor. If a “1099 contractor” can’t produce their own workers’ comp coverage, the auditor reclassifies those payments as payroll and adds them to your premium base — typically at the highest applicable class-code rate for the work performed, since there’s no clean classification history to apply a lower one.
The practical takeaway: underreporting payroll or routing W-2-type work through 1099s to save 8–10% in payroll tax doesn’t make the exposure disappear — it resurfaces at the next audit as a retroactive workers’ comp bill, on top of any IRS or state payroll tax assessment for the same workers.
Penalties for Non-Compliance
| Violation | Penalty | How to Avoid |
|---|---|---|
| Late Form 941/940 filing | 5% of unpaid tax per month, max 25% | File on time even if you can’t pay in full; request a payment plan |
| Late payroll tax deposit | 2%–15% depending on days late | Use EFTPS and set deposit-schedule reminders |
| Late or incorrect W-2 / 1099-NEC | $60–$340 per form (2026); up to $680 for intentional disregard | File electronically by the deadline; verify names/TINs before filing |
| Misclassifying an employee as a contractor | Back FICA + FUTA + penalties + interest; possible loss of the full FUTA credit; retroactive workers’ comp premium | Apply the DOL test; when genuinely close, use W-2 |
| Failing to file new hire reports | $25–$500 per employee, varies by state | File within 20 days federally; check state deadlines |
| Not registering in a work state | Back SUTA + penalties + interest + retroactive unemployment claims | Register before the first day of work; track location daily |
The Trust Fund Recovery Penalty applies when withheld payroll taxes (employee income tax + employee FICA) are willfully not remitted. The IRS can hold responsible individuals — not just the business — personally liable for 100% of the unpaid trust fund amount.
Compliance Checklist
Before hiring your first employee
- Get an EIN from the IRS
- Set up an EFTPS account for federal deposits
- Register for SUTA and income tax withholding in every state where employees will work
- Set up workers’ compensation insurance (required in most states for W-2 employees, and priced from the same payroll data as your taxes)
For every new hire
- Collect Form W-4, state W-4 (if applicable), and Form I-9
- File the new hire report within 20 days federally (check state deadline)
- Apply the DOL test and document your W-2 vs. 1099 decision
- Verify the employee’s name and SSN with SSA’s Business Services Online
Quarterly
- File Form 941 by the deadline for that quarter
- File state unemployment returns
- Reconcile deposits against reported liability
Annually
- File Form 940 by January 31
- File W-2s and 1099-NECs (and furnish copies to workers) by January 31
- File Form W-3 by January 31
- Review your state SUTA experience rating and appeal if it looks wrong
- Close withholding and unemployment accounts in states where work has ended
- Reconcile your 941s and SUTA filings against your payroll register before your workers’ comp audit, not during it
