IRS Publication 15, titled Circular E, Employer’s Tax Guide, is the IRS’s annual instruction manual for running payroll. The 2026 edition explains how to classify workers, decide what counts as taxable wages, withhold federal income tax and FICA, pay federal unemployment tax, deposit those funds on the correct schedule, file the required quarterly and annual returns, and stay clear of the penalties that follow any misstep. If you pay employees, this is the document that governs what you owe, when, and how.
Who Counts as an Employee
Withholding obligations begin only once a worker is an employee, so classification is the first decision. The IRS looks at three categories of evidence: behavioral control (whether you direct how and when the work is done), financial control (whether you control the business side of the arrangement, including payment terms and expense reimbursement), and the type of relationship (written contracts, benefits, and whether the work is expected to continue indefinitely).1Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor No single factor is decisive; the IRS weighs the full relationship.
Misclassifying an employee as a contractor makes you liable for all unpaid employment taxes plus penalties and interest, which is why the safer call when facts are mixed is usually employee status.
Statutory Employees
A narrow group of workers sits between the two categories. Statutory employees are treated as contractors for income tax but as employees for Social Security and Medicare. The four types are certain agent-drivers and commission drivers, full-time life insurance sales agents working primarily for one company, home workers processing materials supplied by the employer, and full-time traveling salespeople soliciting orders from retailers and similar buyers. For these workers you withhold FICA but not federal income tax, unless the worker asks for income tax withholding on Form W-4.
What Counts as Taxable Wages
Almost every form of compensation you pay an employee is subject to withholding unless a specific provision of the code excludes it. That covers salaries, hourly pay, commissions, bonuses, reported tips, and most non-cash benefits.
Supplemental Wages
Bonuses, commissions, severance, and similar payments outside of regular pay are supplemental wages. Up to $1 million in supplemental wages per employee per year, you can withhold federal income tax at a flat 22%. On any amount above $1 million, you must withhold at 37%, regardless of what the employee’s W-4 says.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Fringe Benefits
Employer-provided perks like personal use of a company vehicle, gym memberships, or group-term life insurance above $50,000 in coverage are generally taxable wages. Publication 15-B lists the exclusions, which commonly include health insurance premiums, up to $5,250 in educational assistance, de minimis benefits, and contributions to health savings accounts within annual limits.3Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits Anything not specifically excluded goes into wages at fair market value.
Tips
Employees must report tips of $20 or more in a month to you by the 10th of the following month. You then withhold income tax and FICA on those reported tips along with regular wages. Large food and beverage establishments have an added obligation: if reported tips fall below 8% of gross receipts, the employer must allocate the shortfall among tipped employees and report the allocated tips in Box 8 of the W-2, though no withholding is required on the allocated amount itself.4Internal Revenue Service. Tips
Federal Income Tax Withholding
You withhold federal income tax from each paycheck based on the employee’s Form W-4, which reports filing status, multiple-job adjustments, expected credits, other income, deductions, and any extra withholding requested.5Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate
The actual calculation comes from Publication 15-T, which offers two methods. The wage bracket method is a lookup table by pay period and income range, suitable for manual payroll. The percentage method applies a formula to taxable wages and is what payroll software runs.6Internal Revenue Service. Publication 15-T Federal Income Tax Withholding Methods If an employee never submits a W-4, withhold as if they filed Single with no adjustments.
Social Security and Medicare (FICA)
FICA has two components, each split evenly between employer and employee. Social Security tax is 6.2% on the employee and 6.2% on the employer, applied only up to the annual wage base. For 2026 that base is $184,500, so the maximum Social Security tax per employee is $11,439 on each side.7Social Security Administration. Contribution and Benefit Base8Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Once an employee’s year-to-date wages pass the base, you stop withholding Social Security for the rest of the year.
Medicare is 1.45% each from employer and employee, with no wage cap. Once an employee’s wages cross $200,000 in a calendar year, you must withhold an additional 0.9% Medicare tax on the excess. There is no employer match on the additional 0.9%.8Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
Federal Unemployment Tax
FUTA is an employer-only tax. Employees never see it on their pay stubs. The gross rate is 6.0% on the first $7,000 of wages paid to each employee for the year.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The $7,000 base has been unchanged since 1983.
Most employers pay much less than the gross rate. Paying state unemployment tax in full and on time earns a credit of up to 5.4%, which drops the effective FUTA rate to 0.6%, or a maximum of $42 per employee per year. Employers in states with outstanding federal unemployment loans face credit reductions that raise the effective rate.9Employment & Training Administration (U.S. Department of Labor). FUTA Credit Reductions
FUTA deposits follow their own quarterly rhythm. If your accumulated FUTA liability exceeds $500 in any quarter, deposit by the last day of the following month. If it stays at $500 or less, carry it into the next quarter. FUTA is reported once a year on Form 940, due January 31; on-time deposits earn an extra 10 days to file.10Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements
When to Deposit Withheld Taxes
Withheld federal income tax and both halves of FICA must be deposited on a schedule set by your total liability during a lookback period. For 2026 the lookback period is July 1, 2024, through June 30, 2025.11Internal Revenue Service. Notice 931 – Deposit Requirements for Employment Taxes
Monthly Depositors
If your lookback-period liability was $50,000 or less, taxes accumulated during a calendar month are due by the 15th of the following month.
Semi-Weekly Depositors
If lookback-period liability exceeded $50,000, deposits ride the payday. Wages paid Wednesday, Thursday, or Friday are due the following Wednesday; wages paid Saturday through Tuesday are due the following Friday.12Internal Revenue Service. Employment Tax Due Dates
The $100,000 Next-Day Rule
Accumulating $100,000 or more in employment taxes on any single day requires depositing the full amount by the close of the next business day, regardless of your normal schedule. Triggering the rule also converts a monthly depositor to semi-weekly for the rest of the current year and the whole next year.13eCFR. 26 CFR 31.6302-1 – Deposit Rules for Taxes Under the Federal Insurance Contributions Act (FICA) and Withheld Income Taxes A single large bonus run can hit this threshold, so growing employers should watch for it.
How Deposits Are Made
All federal tax deposits must be electronic. Most employers use the Electronic Federal Tax Payment System (EFTPS), though the IRS also accepts payments through its business tax account and Direct Pay for businesses.14Internal Revenue Service. Depositing and Reporting Employment Taxes EFTPS payments must be scheduled by 8 p.m. Eastern the day before the due date to be timely.15EFTPS. Welcome to EFTPS Online Initiating a payment on the due date itself is late.
Returns and W-2s
Most employers file Form 941 each quarter to report wages paid, income tax withheld, and both shares of FICA. The form is due the last day of the month after the quarter ends: April 30, July 31, October 31, and January 31.16Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return
Employers with an annual employment tax liability of $1,000 or less may qualify to file Form 944 once a year in place of Form 941, but only after the IRS notifies you in writing that you’re eligible.17Internal Revenue Service. Certain Taxpayers May File Their Employment Taxes Annually
By January 31, you must furnish each employee a Form W-2 for the prior year and file W-2s along with the transmittal Form W-3 with the Social Security Administration.18Social Security Administration. Deadline Dates to File W-2s Form 940 for FUTA shares that January 31 deadline.
Penalties
Payroll tax penalties escalate quickly, and some reach the individuals running the business.
Late Deposits
Failure-to-deposit penalties depend on how late the payment is: 2% for deposits 1 to 5 days late, 5% for 6 to 15 days, 10% for more than 15 days, and 15% for deposits still unpaid more than 10 days after an IRS notice. The tiers replace each other rather than stacking, so a 20-day-late deposit is penalized at 10%, not the sum.19Internal Revenue Service. Failure to Deposit Penalty
Late Filing
Filing Form 941 late carries a separate penalty of 5% of the unpaid tax per month or partial month, capped at 25%.20Internal Revenue Service. Failure to File Penalty
Trust Fund Recovery Penalty
Income tax and the employee’s share of FICA that you withhold are trust fund taxes: the money was never yours. Any person responsible for the business’s finances who willfully fails to remit those trust fund taxes can be held personally liable for the entire unpaid amount plus interest. “Willfully” here means choosing to pay other business expenses instead of the withheld taxes. The IRS can pursue officers, partners, sole proprietors, and even employees with check-signing authority, and the corporate form does not shield them.21Internal Revenue Service. Trust Fund Recovery Penalty
Recordkeeping
Keep all employment tax records for at least four years after the tax is due or paid, whichever is later.22Internal Revenue Service. How Long Should I Keep Records? That covers filed returns, W-4s, deposit records, dates and amounts of wages paid, tip reports, and fringe benefit records. Without them, you have no way to rebut the IRS’s numbers in an audit.