IRS Pub 15: Employer Payroll Tax Responsibilities

IRS Publication 15, officially titled Circular E, Employer’s Tax Guide, is a foundational document for U.S. employers. It outlines the responsibilities an employer has for federal employment taxes, guiding businesses through withholding taxes from employee wages, making timely tax deposits, and reporting these activities to the Internal Revenue Service (IRS). The guide is a comprehensive resource intended to ensure compliance with federal tax laws, particularly for new or small business owners.

Initial Employer Setup and Employee Onboarding

Before an employer can process their first payroll, they must obtain an Employer Identification Number (EIN) from the IRS. This nine-digit number is a unique identifier for the business and is required for reporting all employment taxes. The application for an EIN is submitted using Form SS-4, Application for Employer Identification Number, which can be completed online for immediate results.

A key step in the onboarding process is the completion of Form W-4, Employee’s Withholding Certificate, by each new hire. This form is used by employers to determine the correct amount of federal income tax to withhold from an employee’s pay. The employee provides their tax filing status, the number of dependents they will claim, and any other adjustments for additional income or deductions.

A foundational determination is whether a worker is an employee or an independent contractor, as payroll tax requirements only apply to employees. The IRS provides guidance focusing on the degree of control the business has over the worker, considering behavioral control, financial control, and the nature of the relationship. Misclassifying an employee as an independent contractor can lead to significant financial penalties for the employer.

Calculating Employee Tax Withholding

The process of calculating tax withholding begins with the information on an employee’s Form W-4. The two primary components are Federal Income Tax (FIT) and Federal Insurance Contributions Act (FICA) taxes, which are comprised of Social Security and Medicare taxes. The employer is responsible for accurately calculating and withholding these amounts.

For determining FIT withholding, employers can use one of two methods described in IRS Publication 15-T: the Wage Bracket Method or the Percentage Method. The Wage Bracket Method is simpler and involves looking up an employee’s wage in tables corresponding to their filing status and pay period.

The Percentage Method can be used for any employee and is required for wages exceeding the amounts in the wage bracket tables. This method involves a more direct calculation using the employee’s wage amount, filing status, and adjustments from their Form W-4 to arrive at the specific withholding amount.

In addition to income tax, employers must withhold FICA taxes. For 2025, the Social Security tax rate is 6.2% for the employee on wages up to the annual wage base limit of $176,100. The Medicare tax rate is 1.45% of all employee wages, with an additional Medicare tax of 0.9% on wages that exceed a certain threshold based on filing status.

Understanding Employer Tax Liabilities

Beyond taxes withheld from employee wages, employers have their own tax liabilities. These employer-specific taxes are a direct cost to the business and include matching contributions for FICA taxes and paying the Federal Unemployment (FUTA) tax.

For FICA taxes, the employer is required to pay an amount that matches the Social Security and Medicare taxes withheld from their employees’ wages. This means the employer pays 6.2% for Social Security on each employee’s wages up to the annual limit and 1.45% for Medicare on all of each employee’s wages.

The FUTA tax is paid solely by the employer at a rate of 6.0% on the first $7,000 of wages paid to each employee. Most employers can take a credit against their FUTA tax liability for amounts paid into state unemployment funds. This credit can be up to 5.4%, which can reduce the effective FUTA tax rate to 0.6% if state taxes are paid on time.

Depositing Payroll Taxes

After calculating withholdings and employer taxes, the next step is to deposit these funds with the U.S. Department of the Treasury. The total amount to be deposited is the sum of the federal income tax withheld plus both the employee and employer shares of FICA taxes.

The frequency of deposits is determined by a monthly or semi-weekly schedule, which is based on the employer’s total tax liability during a specific “lookback period.” The lookback period for a calendar year is the four-quarter period ending on June 30 of the prior year.

If an employer’s total tax liability during the lookback period was $50,000 or less, they are a monthly depositor and must deposit taxes by the 15th day of the following month. If the liability was more than $50,000, the employer is a semi-weekly depositor with a more complex deposit schedule.

All federal tax deposits must be made using the Electronic Federal Tax Payment System (EFTPS). This is a free service from the Treasury Department, but employers must enroll in advance of their first tax deposit due date, as the enrollment process can take several weeks.

Required Federal Tax Reporting

The final step is to report withheld and deposited taxes by filing specific forms with the IRS. This reporting is a separate responsibility from the act of depositing the taxes.

The primary form for reporting federal income tax and FICA taxes is Form 941, Employer’s QUARTERLY Federal Tax Return. Most employers file this form every three months to report total wages paid, federal income tax withheld, and the total Social Security and Medicare taxes due. The form reconciles the employer’s tax liability with the deposits made during the quarter.

The Federal Unemployment (FUTA) tax is reported separately on Form 940, Employer’s ANNUAL Federal Unemployment (FUTA) Tax Return. This form is filed once a year to report the employer’s total FUTA tax liability and to calculate any credit from state unemployment tax payments. FUTA taxes are typically deposited quarterly if the liability exceeds $500.

By January 31, employers must provide each employee with a Form W-2, Wage and Tax Statement, which details their annual wages and all taxes withheld. The employer also files copies of all employee W-2s with the Social Security Administration, along with Form W-3, Transmittal of Wage and Tax Statements, which summarizes the W-2 information.