Understanding Payroll in the US: What Global Companies Need To Know About USA Payroll
The United States of America is home to approximately 330 million people and the largest economy in the world. It has been a leader in the global economy for more than a century, and so when multinational companies are looking for new markets to explore, the US is often right at the top of the list.
American GDP has consistently grown for decades, save for a brief slowdown related to the global economic crisis of 2008 and 2009 - yet as of 2019, its GDP was over $21 trillion. However, at the time of writing, the United States was one of the countries hit hardest by the COVID-19 pandemic, which may well put the brakes on growth temporarily. Additionally, tariffs introduced by the Trump administration on goods from China and the European Union have further inhibited the potential of international trade with the US.
Doing business in the United States means you can take advantage of a robust customer base and a huge depth of skilled workers in virtually all sectors and industries. However, its employment and payroll regulations are complex, and can vary significantly between its 50 states. This guide to United States payroll highlights the main challenges you’ll need to navigate.
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 between states significantly, 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.
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.
When it comes to employment laws in the U.S., the Fair Labor Standards Act (FLSA) provides guidelines to employers about employment and compensation. 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. But in any case, employers are obliged to display a notice outlining the FLSA guidelines in their workplaces.
The FLSA also requires employers to keep records on their workforce relating to working time and pay, and retain this information for up to three years. The information must be made available to Department of Labor inspectors upon request.
Compensation and Severance
As of 2020, the federal government has set the national minimum wage at $7.25 per hour (approximately £5.90; €6.50). However, 29 states plus the District of Columbia have imposed higher minimum wage rates of their own - with the higher rate taking precedence over the national standard. The top rate currently in place is in Washington, at $13.50 per hour (approx. £11.00; €12.00).
There is no maximum working week defined by the FLSA, although any work over and above 40 hours a week must be paid at a minimum of 150% of the worker’s regular rate. This applies for all instances of overtime, including weekends, rest days and public holidays.
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.
Income Tax Requirements
Businesses with operations in the U.S. must withhold income tax from their U.S.-based employees. Income tax is payable across seven bands, with progressively higher rates applied for higher earnings, ranging from 10% up to 37%. There is no minimum threshold at which income tax is exempt, however the allowances in each band vary for the following groups:- single people; married people filing separately; heads of households; married people filing jointly; widows and widowers.
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.
In addition, state income taxes must be withheld for all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Rates and bands vary from state to state with the highest is in California, where single people earning more than $1 million a year (approx. £815,000; €890,000) must contribute an additional 13.3% on top of their federal income tax.
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.
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.
As of 2020, an employer must contribute 6.2% of an employee’s taxable wages for social security and a further 1.45% for Medicare, while employees make contributions at the same levels. Social security contributions are not required on earnings over $118,500 a year, while the Medicare rate goes up for employees only to 2.35% on earnings over $200,000 a year.
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).
Holiday and Leave Considerations
The United States is unique among advanced economies when it comes to annual leave, as there is no federal law entitling workers to any paid vacation time. Any paid leave contractually offered to an employee is entirely at the employer’s discretion. Even the US’s ten days of national holidays each year do not entitle employees to paid leave. However, there are suggestions that this may change in certain parts of the US. In 2019, New York City mayor Bill de Blasio put forward a proposal to give workers a legal right to ten days’ paid vacation a year.
The Family Medical Leave Act (FMLA) allows for up to 12 weeks of maternity leave for women working in public bodies, schools or organizations of 50 people or more. This leave is unpaid, and again the United States is one of the only countries in the world that does not legally mandate paid maternity leave. Furthermore, there is no legal right to paternity leave - paid or unpaid - yet many employers voluntarily choose to offer paid maternity and paternity leave provisions for their employees.
Finally, if a serious health condition prevents an employee from doing their job, then the FMLA provides for up to 12 weeks’ leave, but this is also unpaid.
The United States is a place to do business like no other, and the opportunities there for growth and profitability are plentiful, especially due to the relatively low level of employee rights compared to most other Western economies. However, as this guide has demonstrated, the lack of federal regulation in many areas, allied to huge variation in rules between different states, makes an entry into the US market potentially complex.
Relying on an experienced global payroll provider can provide the support employers need to ensure that they remain in compliance with the evolving regulatory landscape. And by leveraging their federal and state-specific expertise, you can quickly get up to speed in the US and minimize the risk of heavy penalties for non-compliance. Learn more about CloudPay’s global payroll platform here.
This article 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.