What global businesses need to know about payroll in the United States
It’s often said that ‘everything’s bigger in America’, and that’s certainly the case from an economic and business perspective. At around 345 million people, the United States represents 4.2% of the world’s population, but accounts for a whopping 26% of global GDP; that’s more than the combined total of the next three countries on the list, China, Germany and Japan.
The United States is now a heavily service-driven economy at 80% of GDP, supported in no small part by American dominance in the technology sector. But it still retains a strong industrial heart, exporting nearly $3.2trillion in goods in 2024 alone (approximately £2.53trillion; €3.05trillion).
At the time of writing (February 2025), the second Trump administration has already caused a shake-up in many areas, including potential tariffs on imports from Canada, Mexico and China. It’s vital for any organization wanting to do business in the USA to monitor political developments very closely, through the rest of Donald Trump’s presidency and whoever replaces him in January 2029.
As you’ll discover throughout this guide to running payroll in the United States, two unique characteristics stand out. The first is the very low level of regulation applied in several key areas, and the second is the huge differences in requirements between all 50 states (plus the District of Columbia). This can be good news in terms of setting up a successful American business operation, but can also make running payroll more complicated than in just about any other country in the world.
Getting Started
Before taking any administrative steps, it’s critical to decide which state your business will be headquartered in within the United States, and read up on the employment and payroll considerations within that state. Rules vary significantly between states, and penalties for non-compliance are usually severe, so choosing the right state and understanding your requirements can make a big difference to your potential success and profitability.
If you intend to do business in many states at the same time, and/or the bulk of your activity will be online, then choosing a state with a lower corporate tax rate can make a real difference to your bottom line. As of 2025, there are five states that levy no corporate tax at all: Nevada, South Dakota, Texas, Washington and Wyoming. The highest rate can be found in Pennsylvania at 9.99%.
The most common type of business entity set up by foreign companies in the United States is a corporation. The business must then be registered in all the states in which it intends to run its operations, and these registrations can quickly and easily be done online. This requirement doesn’t apply to states where you don’t have any operations, but where you have customers ordering from you directly. Very few states require a minimum level of capital to establish a corporation, and the amounts required in those that do are typically very small.
Employment Considerations
When it comes to employment laws in the U.S., the Fair Labor Standards Act (FLSA) provides guidelines to employers about employment and compensation. Employers are obliged to display a notice outlining the FLSA guidelines in their workplaces.
However, many states opt to establish more rigorous laws of their own that benefit workers even more; in those cases, employers must follow the state laws instead of those set by the FLSA. And while written contracts are not a legal requirement, some states require information about an employee’s wages and benefits to be set out in writing.
The FLSA sets out a standard working week of 40 hours for the purposes of calculating overtime payments, and any work over 40 hours should be paid at 150% of normal rate. However, there is no additional rate for working rest days, weekends or public holidays, and no limit on how many hours employees are permitted to work in total.
A probation period of 90 days is common in the US, although as employers can generally fire employees ‘at will’ regardless of length of service, they often aren’t necessary. For the same reason, there are no hard and fast rules around notice periods, although many regard two weeks as good professional practice.
Compensation and Severance
One of the few areas of payroll where there are federal requirements in place is minimum wage – as of 2025, this is $7.25 per hour (approximately £5.75; €6.80). However, 30 states and the District of Columbia have legally enforced their own rates, which are usually substantially higher. Indeed, the District of Columbia (including Washington DC) has the highest rate at $17 per hour (approx. £13.40; €16.20).
Many states have responded to a campaign within the US to raise minimum wage rates to at least $15 per hour (approx. £11.80; €14.30). As of 2025, seven states plus DC have reached this level, and it’s likely that more will follow over the next few years.
There is no specific federal law around termination in the USA. In most states, workers can be released at any time for any reason, unless the termination is a retaliatory act, is a consequence of whistleblowing by the employee, or would be considered discriminatory. However, unions and employers can put collective bargaining agreements in place to give workers more protection.
There is also no requirement under the FLSA for severance pay, and this is to be negotiated between employer and employee. However, many states require terminated employees to be paid for any unused time off that they’ve accrued, as well as hours worked up to the time of termination.
Tax and Social Security
Businesses with operations in the U.S. must withhold income tax from their U.S.-based employees. Employers are responsible for submitting employee taxes to the Internal Revenue Service (IRS), which is a bureau of the U.S. Department of the Treasury. Employers submit taxes according to the IRS’s deposit schedule, which is based on the employer’s total tax liability for the withholding period.
Additional employer requirements include:
- Filing Form 941 (quarterly reconciliation) at the end of every quarter
- Filing Form W-3 with the Social Security Administration (SSA) each year
- Providing all employees with Form W-2, which is the annual wage and tax statement, by January 31 of every year
Federal income tax is payable across seven progressively higher bands, from 10% up to 37%. However, the allowances in each band vary for single people; married people filing separately; heads of households; married people filing jointly; and widows and widowers.
On top of this, the vast majority of states also apply their own income tax (the exceptions being Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). Rates and bands vary from state to state with the highest in California, where single people earning more than $1 million a year (approx. £790,000; €950,000) must contribute an additional 13.3% on top of their federal income tax.
Employer Contributions for Social Security and Medicare (FICA)
The Federal Insurance Contributions Act (FICA) requires U.S. employers to withhold Social Security and Medicare contributions from employee paychecks. The employer must then submit the withholding and contribution amount to the IRS based on the employer’s total amount of tax liability for the withholding period via electronic funds transfer (EFT).
Social security contributions are 6.2% by employers on the first $168,000 of earnings per year (approx. £132,500; €160,000), and 6.2% by employees on the first $160,200 of annual pay (approx. £126,500; €152,500).
Medicare contributions are 1.45% by employers on the first $200,000 of annual earnings (approx. £158,000; €191,000). The same rate applies to employees, but they must also pay 2.35% on any earnings over $200,000.
Additional federal and state unemployment taxes must be paid by the employer under the Federal Unemployment Tax Act (FUTA) and various state unemployment tax laws.
Holiday and Leave
There are no federally mandated entitlements to paid leave in the United States (except for federal employees), and very few states have their own legislation in place in this area. This means that paid leave entitlement is entirely up for negotiation with employers.
The same applies to public holidays in the US, where it is up to employers whether to provide paid time off on a case-by-case basis. The majority of organizations choose to provide paid time off on six days each year: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day.
Parental leave is regulated by the Family Medical Leave Act (FMLA), which entitles mothers and fathers working in public bodies, schools or in organizations of 50 people or more to 12 weeks’ leave. This leave is unpaid, and the United States is one of the only countries in the world that does not legally mandate paid maternity leave.
However, in recent years, more and more states have been introducing their own legislation that provides paid time off for new mothers and fathers. And in any case, many organizations will voluntarily offer maternity and paternity leave and pay as an employee benefit.
The situation with sick leave and sick pay is very similar to that of parental leave. The FMLA provides up to 12 weeks unpaid leave if an employee is unable to work. However, at the time of writing, 18 states and Washington DC had introduced paid sick leave entitlements at local level.
In Summary
The United States really is the ‘land of opportunity’, but from a payroll and employment perspective, it effectively has to be treated as 50 different countries rather than one. Accessing general US payroll expertise may not be enough to stay compliant and meet all your requirements: instead, we recommend connecting with payroll experts in each state you plan to operate in. It’s this kind of situation where working with a global payroll provider and their worldwide network of local partnerships can be invaluable.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay.