IRS Publication 15

IRS Publication 15 tells employers how to write paychecks.  That’s what is all boils down to: your tax obligations to the IRS and to your employees when it comes to being the boss.  IRS Publication 15, or Circular E as it’s sometimes called, is a 67-page document published every year by the IRS…67 pages of how to write paychecks and submit tax forms.  Not really light reading at all but it does serve as the ultimate guide to calculating withholding and fulfilling your duties as an employer.  If we break it down into sections IRS Publication 15 isn’t so bad.  Here’s an overview:

In essence, IRS Publication 15 tells employers how to…

  1. calculate withholding
  2. how to submit that withholding to the IRS
  3. how to pay employer’s share of Social Security & Medicare taxes
  4. how to pay Federal Unemployment Tax

IRS Publication 15 Tells You How to Calculate Withholding

What makes someone your employee, as opposed to a contract worker?  It would be nice to just hire all contract workers and write a straight paycheck with no fancy withholding of taxes taken out.  No calculating withholding, no reporting withholding to the IRS.  Unfortunately most of us hire employees, not contract workers.  There’s a clear difference and if employees is what you have then there’s no getting around this fact.  IRS Publication 15 will define this for you so you know whether you are required to perform withholding on your employees’ paychecks.

Every employee will fill out a W-4 form.  You need this in order to calculate withholding.  Keep the W-4 on file and let them know they can revise it at any time.  The W-4 form will tell you, the employer, how many allowances each employee is claiming.  The formula for withholding involves multiplying this number (of allowances) by a certain number which is given in IRS Publication 15.  How much money for each allowance changes each year, which is why you need an updated Circular E each year.

Each allowance is worth around $150 on a biweekly payroll schedule.  That’s for 2013.  You take the number of allowances (let’s say “2” for this example).

2 (allowances) * $150 (biweekly schedule allowance amount) = $300

Subtract $300 from the amount of the paycheck.  What’s left is called amount subject to withholding

The amount subject to withholding  is what is taxed.  Look up the amount in the income tax withholding tables, found in IRS Publication 15

There, you did it!  You calculated withholding.

IRS Publication 15 Tells You How to Submit Withholding to the IRS

Now that you’ve kept some money out of your employees’ paychecks, what do you do with it?  Submit it to the IRS, that’s what.  You do this four times a year in great big chunks of money.  If your chunks of withholding money are large enough, the IRS requires that you pre-pay those chunks electronically.  That’s called making federal deposits.  You will be required to make an account with EFTPS , the IRS’s electronic payment system.  EFTPS will pull the money from whatever bank account you specify.  The money must be deposited on time, before the paperwork for withholding is due.

If you only have one employee or don’t have much withholding to submit, you can submit your quarterly payments with the form that’s used to report withholding, called IRS form 941.  This is due on the last day of the month after the close of each quarter.  You can make electronic payments or you can submit a money order.

IRS Publication 15 Tells You How to Pay Your Share of Employees’ Payroll Tax

Well you already know how to perform withholding on your employees’ paychecks.  And you know that you have to fork over that money four times a year.  But you have more money to fork over: your share of the payroll tax, as it’s called.  It’s also reported on IRS Form 941.  IRS Publication 15 tells you how to calculate this, too.

IRS Publication 15 Tells You How to Pay FUTA

FUTA stands for Federal Unemployment Tax, which you have to pay one a year on IRS Form 940.  Very easy to calculate, and due January 31 for the previous year.

What Else is Pub 15 Good For?

All the little exceptions and unusual situations involving paying your employees and reporting payroll tax to the IRS.  Payroll tax is made up of Social Security Tax and Medicare taxes by the way.  For a complete look at all 67 pages, including withholding tables, see the IRS website’s PDF version of Pub 15 here.