Payroll Tax Basics

Prepare yourself to deal with payroll taxes by learning the basics

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.

 

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.
Try: 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.
Try: 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.
Try: 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.

 

• 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.

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