Payroll withholding policies change often. Keeping up to date with these changes can be a full time job, but keeping up with them can save you from having to pay steep fines and penalties.

Focusing only on payroll taxes when you run a business is close to impossible. To make it easier to stay abreast of the most current payroll tax news and trends, while still effectively running your business, consider the following suggestions:

1. Comply with all payroll tax laws.

2. Learn about payroll tax policy changes as soon as they become effective.

3. Find out how payroll tax changes affect your business.

Action Steps
The best contacts and resources to help you get it done

Stay up to date with the latest compliance requirements for payroll taxes

Compliance requirements concerning payroll withholdings change from time to time. Staying up to date on this information, including bracket specific time lines, can save you the hassle of late filing and having to pay penalties.

I recommend: Symmetry Software hosts a payroll tax forum where you can ask other business owners and tax professionals questions or you can just read the questions and answers others post. You can find information about payroll tax compliance at Business Owner's Toolkit.

Know the most up to date payroll tax policies

Part of knowing how to figure payroll taxes is knowing the most current payroll tax policies. These policies include knowing the difference between an employee and an independent contractor. When these policies change, even if the change is minor, they can throw a monkey wrench into the most sophisticated payroll tax programs. Getting updates as soon as you know policy effective dates gives you a heads up to help lessen the chance of you making an error when calculating payroll taxes.

I recommend: The Tax Policy Center website offers updates about payroll tax policies, including descriptions of the policies and how the changes affect your employees and your business. The IRS offers numerous publications to help you stay up to date on the latest payroll tax policies.

Find out how changes in payroll withholding affects your business

In some cases, the effects of changes in payroll taxes isn't immediately evident. Despite that fact, even a seemingly simple change in payroll tax programs and policies can affect your business. Economists and attorneys usually have the tools available to forecast how various changes will affect every business. Reading blogs written by these professionals allows you to tailor your business payroll withholding system to cope with the changes to minimize the effect on your business.

I recommend: Tax Problem Attorney Blog is maintained by tax attorneys. This blog keeps you up to date on all the latest payroll tax information. You can subscribe to this blog via RSS feeds or email subscription. TaxFoundation.org maintains a payroll tax blog that gives you insight into how various factors can affect your payroll tax dollars.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Consider outsourcing your payroll if you find it too difficult to figure payroll taxes. An added bonus of outsourcing is that you now have the security of knowing a professional does your taxes, which is usually a guaranteed service.

If you hire employees in your business, you'll also need to collect payroll taxes and remit them to the correct government agencies. It's not an option. Failure to correctly collect and file the full range of required payroll taxes has tripped up many small business owners, subjecting them to government audits and fines.

Before you hire your first employee, make sure you know what payroll taxes you need to withhold and how much. There are several types of payroll taxes:

1. Social Security and Medicare taxes, or FICA
2. Federal and state unemployment taxes.
3. Federal, state and local income taxes.
4. State disability taxes.

Action Steps
The best contacts and resources to help you get it done

Know your requirements

You'll need to determine which of your workers are considered employees subject to withholding. You also need to know exactly what taxes you should collect for federal, state and local governments in your area.

I recommend: The U.S. Small Business Administration (SBA) has a super-helpful Payroll Taxes page with and overview or each type of payroll tax and useful links to federal and state taxing agencies. The IRS has a complete rundown of your tax obligations as a small business employer. Also see Your Payroll Tax Obligations at Business Owner's Toolkit.

Determine what amounts are subject to withholding

Not all compensation is subject to withholding. FICA, for example, only applies up to a certain amount of wages. Business expense reimbursements are not taxable. If you have a restaurant with waiters, be aware of the rules for reporting and withholding on tips

I recommend: For an overview, see What Compensation is Taxable.

Calculate employee payroll taxes

For each employee who gets wages, you'll need to calculate and withhold taxes for each pay period. You can do this manually if you're willing to spend the time and effort. But there are software programs and payroll services available to do it for you.

I recommend: For an estimate of what you will have to withhold, plug your numbers into the Paycheck Calculator. Some software and payroll service options: Paychex, QuickBooks, NetSuite and Peachtree.

Properly handle payroll tax collections

You not only have to collect payroll taxes, you also have to report your collections both to your employees and to the agencies, and you have to forward the amounts collected. You must register with each agency and hand off taxes according to the rules.

I recommend: For a full discussion of your obligations and how to handle them, read Payroll Tax Returns and Payments. Banks will often handle much of the payroll tax process for you. For an example, check out the Bank of America.

Retain records

Your obligations aren't done yet. You have to keep records of your payroll taxes (for as long as eight years in the case of Minnesota) and be ready to share them with the IRS or other agencies.

I recommend: For a list of the types of records you need to keep and how long you need to keep them, see Payroll & Tax Records.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Never shirk your payroll tax duties, and never 'borrow' from your payroll taxes account. The penalties if you're caught can be severe.
• •  If you don't have an accountant familiar with payroll taxes, you might want to consider hiring one. Good advice on payroll taxes in advance can save you time and trouble in the future.
• •  Be sure to check reporting requirements. Very small businesses that collect $1,000 or less in payroll taxes in a year may be required to file federal reports annually instead of quarterly.
• •  Use electronic transfers for handing over your payroll taxes. It's a handy and convenient time saver.
• •  Some states have disability insurance programs that require payroll deductions. Be sure to check if you need to add disability to your withholding.

Business owners spend a considerable amount of time and money to ensure payroll tax compliance. Learning the payroll tax basics can speed up the process and allow you to focus on growing your business.

Understanding payroll tax basics one at a time is the key to fully understanding the subject. Consider these suggestions to help you learn the ins and outs of payroll taxes:

1. Learn the payroll tax terms and acronyms to make understanding the policies and procedures as easy as possible.

2. Distinguish different types of employees and contractors according to the strict definitions set by the IRS.

3. Know the types of compensation that are exempt from payroll tax withholding.

Action Steps
The best contacts and resources to help you get it done

Become familiar with payroll tax terms

Payroll tax programs and policies have a language that is difficult to understand without having a basic knowledge of some common terms. For example, backup withholding means that you must take a certain percentage, usually 25%, out of wages for an employee that provides an incorrect Taxpayer Identification Number (TIN) if the payments must be reported on a 1099.

I recommend: You can find a detailed list of common payroll withholding terms at Symmetry Software. This website also offers in depth articles about common payroll tax problems. Tax Policy Center offers easy to understand definitions to common payroll tax terms and acronyms.

Learn who is exempt from payroll withholdings

When you open a business, you have to decide if you are going to work with employees or independent contractors. This largely depends on the nature of your business. Generally, if you control the person's work schedule, that person is an employee. On the other hand, an independent contractor sets her own schedule. Employees are subject to payroll taxes while independent contractors aren't.

I recommend: You can find explanations of employee payroll taxes at AllLaw.com. This website offers up to date information, including information to help you determine if you must withhold taxes from employee wages. The IRS offers worksheets and detailed information to help you determine the type of employees you have and what to do about federal taxes for each type.

Determine what wages are subject to payroll withholdings

In most cases, any money paid to an employee or anything of value given to an employee is considered subject to payroll withholding. There are some exceptions to this rule. Certain tips or business expense reimbursements are exempt from payroll taxes. Knowing what is taxable prior to calculating payroll taxes makes it easier for you to figure payroll taxes.

I recommend: Business Owner's Toolkit offers articles concerning specific payroll tax issues, including how to determine what benefits and compensation is taxable. All Business offers information about various IRS determinations concerning payroll taxes on benefits and other payroll tax topics.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Consider signing up for a class at a local college to learn how to figure payroll taxes. Many colleges have an entire course dedicated to this subject. In some cases, you may have to pay a fee to attend, even if you aren't participating in the class.

Most business owners can benefit from knowing payroll tax key terms. Even if you have an accountant, you'll want to know the basic terms so you can understand questions your accountant may have. For some business owners, it makes more sense to use a software program rather than an accountant to figure out the payroll tax, but you'll still need to know the terms used by the software program in order to enter the correct information.

Action Steps
The best contacts and resources to help you get it done

Payroll tax compliance

The Internal Revenue Service (IRS) is the organization that oversees payroll tax. Payroll tax compliance means your business is following the rules and regulations established by the IRS.

I recommend: Tax Tiger provides an overview on what a business needs to do in order to be in compliance with payroll tax regulations.

Types of compensation

When you think of compensation, you probably think of wages. But there are different types of compensation, including salaried wages, hourly wages and stipends.

I recommend: American University provides a breakdown of the different types of compensation it uses to pay employees.

Independent contractors

There are different types of employees, and some organizations use independent contractors. An independent contractor generally has a contract with the company for a set period of time. An independent contract, separate from any agreements with regular employees, covers a contractor's work.

I recommend: The IRS provides a guide to help you determine the difference between an employee and an independent contractor.

Taxpayer identification number

A taxpayer identification number is a way for the IRS to identify your business with your payroll tax. Your business will have a unique number, and those you pay will also be identified by Social Security number or employee identification number.

I recommend: InvestorWords provides a definition for taxpayer identification number.

Payroll withholding

Most employers take out a certain amount of money from an employee's check to put toward payroll tax. The IRS calls this payroll withholding. Most employees fill out information at the beginning of employment in order to help the employer know how much money to withhold. Payroll taxes are not generally withheld from independent contractors' compensation.

I recommend: Comptroller of Maryland offers resources on employer payroll tax withholdings.

Backup withholding

Backup withholding is a way for the IRS to collect back taxes owed by a wage earner, most often in the case of undeclared investment earnings. The IRS notifies an employer of the need to withhold back taxes (in addition to taxes withheld throughout the year) from an employee's salary and forward it to the IRS.

I recommend: Investopedia explains what backup withholding is and offers examples of when the IRS might use this procedure.