Circular E
Circular E
What is Circular E?
Circular E, officially known as the IRS Publication 15 - Employer’s Tax Guide, is a comprehensive tax document issued by the Internal Revenue Service (IRS). It provides guidance to employers on how to withhold, deposit, and report federal income tax, Social Security tax, and Medicare tax for their employees.
What Information is Included in Circular E?
Circular E serves as a key reference for employers and payroll professionals. It includes:
- Federal Income Tax Withholding Tables: Guidelines for calculating and withholding employee income taxes.
- Social Security & Medicare Tax Rates: Employer and employee contribution rates for payroll taxes.
- Federal Unemployment Tax Act (FUTA) Details: Employer responsibilities for FUTA tax.
- Tax Deposit Requirements: Instructions on depositing withheld taxes using the Electronic Federal Tax Payment System (EFTPS).
- Filing Deadlines: Due dates for submitting payroll tax returns (Forms 941, 940, W-2, and W-3).
- Employee Classification Rules: Guidance on distinguishing employees from independent contractors.
- Penalties & Compliance: IRS penalties for late tax deposits and filing errors.
Who Needs to Use Circular E?
Circular E is essential for:
- Employers: Businesses required to withhold and pay federal payroll taxes.
- Payroll Providers: Companies handling payroll processing and tax reporting.
- Accountants & Bookkeepers: Professionals managing employer tax obligations.
- HR & Business Owners: Those responsible for employee payroll and benefits.
How to Calculate Federal Income Tax Withholding Using Circular E
Employers use the IRS income tax withholding tables in Circular E to determine how much federal tax to deduct from employee wages. The process includes:
- Determining the employee’s filing status and allowances from Form W-4.
- Locating the employee’s pay range in the IRS tax tables.
- Using the correct percentage method or wage bracket method to calculate withholding.
Tax Deposit Schedules in Circular E
Employers must deposit payroll taxes on a monthly or semiweekly schedule based on their total tax liability:
| Deposit Schedule | Requirement | Due Date |
|---|---|---|
| Monthly Depositor | Less than $50,000 in payroll taxes in the previous year | 15th of the following month |
| Semiweekly Depositor | More than $50,000 in payroll taxes in the previous year | Wednesday or Friday, depending on payroll date |
Filing Payroll Tax Forms Listed in Circular E
Circular E outlines the forms employers must file, including:
- Form 941: Quarterly report for federal income tax, Social Security, and Medicare tax.
- Form 940: Annual FUTA tax return.
- Form W-2: Reports employee wages and taxes withheld.
- Form W-3: Summarizes W-2 forms for the Social Security Administration.
Penalties for Non-Compliance
Employers who fail to follow IRS guidelines in Circular E may face penalties, including:
- Late Deposit Penalty: 2% to 15% based on the delay period.
- Failure to File Penalty: 5% per month, up to 25% of the unpaid tax.
- Trust Fund Recovery Penalty: IRS-imposed penalties for unpaid payroll taxes.
How to Access Circular E
Employers can download the latest version of IRS Publication 15 (Circular E) from the official IRS website.
Key Takeaways
- Circular E (IRS Publication 15) is the official tax guide for employers managing payroll taxes.
- It includes withholding tax tables, Social Security and Medicare tax rates, and deposit schedules.
- Employers must deposit payroll taxes monthly or semiweekly based on their tax liability.
- Failure to follow Circular E guidelines can result in IRS penalties.
- The latest version of Circular E is available on the IRS website.