Circular E
Circular E, also known as Publication 15, is a document produced by the Internal Revenue Service (IRS) in the United States. It provides employers with detailed information about their tax responsibilities relating to employee compensation. The document covers topics like payroll taxes, social security and Medicare taxes, income tax withholding and depositing, as well as tax tables.
Last updated: July 23, 2023 • 3 min read
What Is Circular E?
Circular E, also known as the Employer's Tax Guide, is a document published by the U.S. Internal Revenue Service (IRS). The guide provides employers with updated tax tables and instructions for withholding federal income tax and FICA tax from employee's wages. It also provides information related to reporting requirements, depositing schedules, and other important issues related to payroll taxes.
What Is the History of Circular E?
The history of Circular E, also known as the Employer's Tax Guide, is directly tied to the history of income tax in the United States.
First, the roots of the Circular E can be traced back to the Revenue Act of 1861, when income tax was first introduced in the United States during the Civil War. The tax was initially set at 3% of all incomes over $800.
The current model of income tax withholding, where employers directly subtract taxes from employees' wages (which the function of Circular E instructs), emerged from the Current Tax Payment Act of 1943, during World War II. Because of the increased need for revenue during the war, the model allowed the government to have a consistent influx of funds.
Over the years, the IRS has revised and updated the Circular E, or the Employer's Tax Guide, to reflect changes in tax laws and regulations. Each tax year, a new version of the Circular E is issued with updated gross income tax withholding tables, contribution limits, and more current pertinent tax information.
How Do You Compute Tax Withholdings Using the IRS Circular E Employer's Tax Guide?
Identify the employee's taxable wages: This includes any salaries, tips, bonuses, commissions, or other types of compensation. You then subtract any pre-tax deductions, such as contributions to retirement plans or health insurance premiums.
Determine the employee's filing status and allowances: You can find this information on Form W-4, which every employee needs to fill out. It lists their filing status (single, married filing jointly, head of household, etc.) and the number of allowances they claim.
Select the correct table from the Circular E: There are separate tables for employees who are paid daily, weekly, bi-weekly, semi-monthly, and monthly. The wage brackets within each table further subdivide based on the employee's filing status and the number of withholding allowances claimed.
Use the appropriate wage bracket to find the amount of withholding: Finally, locate the employee's wage range in the appropriate wage bracket. The table will tell you how much to withhold based on the wages and the number of allowances claimed.
Remember that the employer has to calculate and withhold both federal income tax and FICA (Social Security and Medicare) taxes. The Circular E contains specific information and guidelines about how to calculate these different withholdings. It’s essential to remember that tax laws and brackets can change from year to year, so always use the most current version of the IRS Circular E.
What Are the Benefits of Circular E?
Guidance on Tax Withholding: Circular E helps employers accurately comply with tax laws by providing instructions on how to withhold the correct amount of income tax and FICA taxes from their employees' wages.
Provides current information: The guide is updated every year to reflect changes in tax laws and regulations, ensuring employers have the most accurate and current information.
Easy to understand: The guide is written in a clear, straightforward manner, making complex tax information easier to understand.
Contains comprehensive information: Beyond withholding instructions, it also provides information about depositing and reporting withheld taxes, correcting errors, and other topics related to payroll taxes.
Avoidance of penalties: By following the guidelines in Circular E, employers can avoid penalties associated with under withholding or failure to properly deposit withheld taxes.
Ease of access: The guide is available online for free, which makes it easily accessible for everyone.
Which Employers Are Likely to Be Affected by Circular E?
All employers who have employees based in the United States and thus withhold income tax and FICA taxes from their employees' wages are required to follow the guidelines set by Circular E, or the Employer's Tax Guide. This includes both for-profit businesses and non-profit organizations. The guide applies regardless of the company's size or the number of employees. Self-employed individuals who have hired employees for their businesses are also required to abide by Circular E.