Payroll Guide USA

December 17, 2019 | Yana Todorova 5 Mins read

Looking to expand into the United States? Here is a detailed guide to help you get acquainted with payroll in the U.S.

 

Ease of Doing Business in USA: An Overview

Surprisingly, the United States does not even rank in the top 5 best countries within which to do business. It ranks 6th. However, each of the top 5 countries possess notably small and less complicated economies. That being said, the United States continues to lead the world in terms of technology and investor capital.

 

Forbes noted that “according to the US Census Bureau, over 50% of the job creation in the United States since 2005 has been by high-growth technology startups.” As such, the ease of doing business may not be as great as other economies, but the innovative resources in the U.S. are unsurpassed.

 

Recent Developments in USA Payroll Laws

All American employees must pay social security taxes for retirement income. However, employees that make $137,700 or more in annual income are exempt from social security taxes. This income base was just increased as of January 1, 2020 from $132,900.

A common issue in the United States is the sheer volume of illegal immigrants. Many previous administrations have looked for creative solutions to the problem, such as granting more work visas. The current Trump administration has taken the illegal immigration problem seriously. As such, employers hiring immigrants in the United States must work harder to secure all proper visas for/from their foreign workers.

 

Basic Facts about Payroll in USA

All employers within U.S. borders must register their business to receive an Employer Identification Number with the IRS. There are many different taxes that anyone doing business in the U.S. must pay and/or withhold from an employee’s paycheck. These include:

  • Corporate taxes
  • Income taxes
  • Social Security
  • Medicare
  • Sales taxes
  • Payroll and withholding taxes
  • Unemployment
  • Workers Compensation

Further, some taxes are state taxes, and some taxes are federal taxes. Income taxes are taken on both the state and federal level (in most cases).

 

Because of the number of different taxes that employers must pay and/or withhold, a great majority of small, medium, and large business owners hire a payroll company to help them remain compliant with regards to payroll taxes.

 

Taxes

As noted above, there are anywhere from 6 to 8 (or more) different kinds of taxes that employers must pay or withhold for their payroll employees. All payroll employees are required to complete a W-4 form for their employer. The information provided on a W-4 indicates how much in state and federal income taxes that employer must withhold from the employee’s paycheck.

 

Rates and Thresholds

State tax rates vary state to state. Federal taxes break down according to the tax rate chart below. Federal tax rates range from 10-37% depending upon the employee’s income. Both social security and Medicare taxes are split between the employee and the employer. For example, all employee incomes of $137,699 or less pay 6.2% social security taxes, and the employer pays the other half (6.2%).

 

How Withholding Works

Employers must deduct federal, state, social security, and Medicare taxes according to the employee’s information provided in their W-4. At the end of the year, whatever taxes should have been paid that were not withheld by the employer (even though the employer followed the information in the W-4) are the employee’s responsibility.

 

Returns and Remittance

At the end of the year (December 31), employers should provide each employee with a W-2 statement indicating the total amount of taxes withheld from their paycheck that year. When the employee files their taxes no later than April 15, they are responsible for any taxes owed beyond what was withheld.

 

If the W-4 information was accurate, the employee should not owe any taxes. In many cases, however, the employee may have failed to claim deductions for which they qualified on their W-4, resulting in them overpaying taxes that year. After filing their taxes, the federal and state governments issue refunds in the amount paid above what that employee was required to pay.

 

Employee Stock/Share Plans

While employers are not required to do so, many choose to offer employees a variety of stock options or shares in the company. A common benefit offered by employers is withholding a percentage of earnings to stow into a company 401k or retirement program.

 

Penalties

Failing to withhold taxes according to an employee’s W-4 form means that the employer is subject to fines and penalties. Obviously, intentionally incorrect tax payments related to corporate, payroll, withholding, or income tax could result in felony charges, including tax fraud. As mentioned above, the American tax code is complicated. Therefore, businesses operating in the U.S. should seriously consider working with a reputable payroll company.

 

Tax Rate Chart

Employers must properly pay their own sales, corporation, payroll, and withholding taxes. The chart below outlines how much they must withhold from their employees’ paychecks.

 

Income Tax Withholding Rate Single or Married Filing Separately Head of Household (that is, has dependents) Married Filing Jointly Social Security Tax Medicare Tax
10% $9,700 or less $13,850 or less $19,400 or less 6.2% (employers pay)/6.2% (employees pay) 1.45%/1.45%
12% $9,701-$39,475 $13,851-$52,850 $19,401-$78,950 6.2%/6.2% 1.45%/1.45%
22% $39,476-$84,200 $52,851-$84,200 $78,951-$168,400 6.2%/6.2% 1.45%/1.45%
24% $84,201-$160,725 $84,201-$160,700 $168,401-$321,450 N/A* 1.45%/1.45%
32% $160,726-$204,100 $160,701-$204,100 $321,451-$408,200 N/A* 1.45%/1.54%**
35% $204,101-$510,300 $204,101-$510,300 $408,201-$612,350 N/A* 1.45%/1.54%**
37% $510,301+ $510,301+ $612,351+ N/A* 1.45%/1.54%**

 

The chart above does not include state taxes, unemployment, or workers compensation.

 

*The limit on social security contributions applies to individual income exceeding $137,700 a year.

**The .9% increase only applies to individual incomes in excess of $200,000.

 

 

Compensation and Benefits

When it comes to wages and benefits, employers should consult both federal and state guidelines. Whichever requirements benefit the employee most should be upheld..

 

Minimum Wage

The federal minimum wage is $7.25 an hour. However, each state may have its own minimum wage requirements for hourly employees. The law declares that whichever minimum (federal or state) is highest must be paid to that employee.

 

There are no salary minimum wages in the U.S. That being said, salary contracts must stipulate exactly what the salary is, whether or not there are earned commissions, etc.

 

Overtime

Hourly employees working overtime must be paid 1.5 times their normal hourly rate. There are exempt (usually salaried employees) and non-exempt employees. Non-exempt employees are entitled to overtime pay when their hours exceed 40 hours within a workweek. Working on holidays or weekends do not necessarily require employers to pay overtime unless those hours exceed a normal 40-hour workweek.

 

Different states may have different requirements regarding overtime pay. Additionally, many employers may incentivize certain work hours with overtime or double pay if they wish.

 

Hours of Work

There are no set federal limits on hours worked, so long as non-exempt employees are paid 1.5 times their normal rate on any hours worked over 40 in a week. State labor laws may set maximum work hours, but that is unlikely in most states.

 

Holiday & Sick Leave

While federal laws do not require employers to offer their employees paid leave for any reason, most states require paid leave under certain circumstances. Further, to acquire and retain top talent, most employers are going to provide a certain amount paid leave to their employees.

How Employees File Taxes at the End of the Year

All U.S. employees are required to file their own taxes at the end of the year. The employer issues them a W-2 form that shows exactly how much taxes were withheld for the year. If the employee underpaid, they are solely responsible to pay the remaining balance. All U.S. employees must file their taxes (either personally or with the help of an enrolled agent or accountant) by April 15.

 

In many cases, employees overpaid taxes, had another child, or invested in property during the year. After taking into account all paid taxes and tax credits, the federal and state tax agencies send tax refunds directly to the employee.

 

Foreign Hires

Immigrants and foreigners may secure the proper work visas to work inside the U.S. legally. Foreign employees that desire to reside permanently in the U.S. must secure what is known as a Green Card Visa. 

 

For non-immigrant work visas, employers must make a formal job offer and sponsor that employee for the appropriate work visa based on their job description and industry. For legal foreign workers, employers must demonstrate that that employee possesses knowledge or skills that cannot be otherwise reasonably attained.

 

For more information about local payroll provider partners contact Payslip today


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International Payroll Manager, Phorest