You don’t need us to sell you the idea of doing business in the United States of America, because the hard facts of its dominant position in the global economy do it for us. Its annual GDP is now worth more than $23 trillion dollars, and accounts for around one-quarter of the entire global total. Its population of around 330 million is highly skilled and educated, and the opportunities to start and grow businesses make it a desirable place for people around the world to live and work.
And in many ways, the United States really is the ‘Land of the Free’ when it comes to payroll and employment considerations: its laws and regulations are often far looser - and in many places non-existent - compared to other developed economies. However, some of the rules that are in place can be extremely complicated and can vary significantly between all 50 states (plus the District of Columbia).
That’s why a sound understanding of American payroll requirements is essential for any expansion into the US market, and why this guide is your perfect place to start.
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.
For example, there is no federally mandated maximum number of working hours set out in the FLSA. However, any employees who work more than 40 hours a week are entitled to overtime at a minimum of 150% of their normal hourly rate.
Written contracts are not a legal requirement. However, some states require information about an employee’s wages and benefits to be set out in writing.
Compensation and Severance
As of 2023, the federal government has set the national minimum wage at $7.25 per hour (approximately £5.90; €6.70). However, 30 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. District of Columbia, where Washington D.C. is located, at $16.50 per hour (approx. £13.30; €15.20).
There has been a movement within the USA in recent years called ‘Fight for $15’, within which people are campaigning for minimum wage rates to be raised to at least $15 per hour (in places where this isn’t already the case). Several states have already passed legislation to raise their rates to this level between 2024 and 2026, including New Jersey and Florida. More may follow in the months and years to come, so you should follow progress in this area closely.
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. 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, South Dakota, 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. £810,000; €920,000) 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 $160,200 (approx. £130,000; €147,000) a year, while the Medicare rate goes up for employees only to 2.35% on earnings over $200,000 (approx. £161,000; €184,000) 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
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. Additionally, there are very few laws regarding paid leave, even at state level, so any paid leave contractually offered to an employee is entirely at the employer’s discretion. Even the US’s nine days of national holidays each year (and its huge array of holidays served across different states) do not entitle employees to paid leave
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 really a unique place to do business, with huge variations in laws and regulations between states and relatively few restrictions on employing staff, meaning employers have plenty of flexibility. However, as this guide demonstrates, there are some areas where payroll and employment can be fiendishly complicated, especially if you plan to operate nationally or in multiple states. This is where the help of a global payroll provider can be so important so that you can always stay on the right side of compliance and grow your business without the risk of sanction.
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.