Payroll Tax Key Terms

Ensure your compliance by understanding payroll tax key terms
By Tara McClendon, Freelance Writer/Editor Tara McClendon 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.
 

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