Accounting and tax professionals will often tell you that the most complicated requirement in the payroll process is taxation. Payroll taxes are imposed by each state, on each employer’s payroll, and of course each state has different rules.

There is a point in which businesses must begin to pay payroll tax. Many small companies, however, don’t need to pay payroll taxes because their total wages paid do not meet a certain base line.

The tax laws state that wages are taxable. Wages are generally referred to as any wage, allowance, or commission paid to an employee. It does not have to be in the form of money. Non-cash benefits are also eligible for payroll tax, such as corporate cars and business entertainment. Meal allowances, contracts and commissions paid for insurance, are some of the other types of earnings where payroll tax must be paid..

Payroll tax exemptions are for wages paid by hospitals, charitable organizations, religious organizations, and some local government bodies.

Payroll rules also exist for employers who are considered to be a group employer. Each member of the group has to pay a pro-rata proportion of the total tax payable by the group. These four groups are:

-A branch or agency of a parent business.
-Two or more businesses under the control of the same person.
-An employer who also uses the employees in another business.
-Corporations that are classes as related companies.

If the wages that are paid by an employer pass the specific amount appointed by each state, the employer must register as an actual employer and the wages are liable for payroll tax. This base amount varies from $43,000 per month to $125,000 per month, depending on the state, all of which are liable for taxes.

The annual rate of tax also varies between the states.

Careful thought must be taken where payroll tax requirements are concerned, because there are large penalties for errors. Also, legislation and regulations change frequently so these should be checked often. Because of these penalties, and the complexity of the payroll taxation system, it is wise for most businesses to outsource to a payroll service or accounting professional. These services provide companies with accuracy in completing their payroll needs, and it’s cost-effective.

Business owners who are not certain about these taxations and don’t know the ever-changing tax laws in their state should consult with a tax professional who will guide them through the process of getting their tax requirements in order and assist them with all of their forms.

Daniel Stoica Accounting Professional