COUNTRY GUIDE
Payroll and HR in: United States
A recognised leader in research and development and a wealth of resources at your disposal, incorporating a new business in the US is often a straight-forward and quick process. Here’s what you need to know about US payroll and HR.
Local currency
USD
Dialling code
+1
Pay periods
12 – 26
World Bank Ease of Doing Business
6
Capital
Washington D.C
Timezone
PT, MT, CT, ET
Lanuages
English
Tax year
Jan 1st – Dec 31st
Sales tax
0 – 16%
Company tax
21%
Social security
6.2%
Wages tax
10 – 37%
The basics: Getting started with USA Payroll
As a non-resident of the US you have two main options for setting up a new business:
- Limited Liability Company (LLC): Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
- C Corporation: A business structure in which owners, or shareholders are taxed separately from the entity
The system for paying tax through an employee’s salary in the US is called ‘tax withholding’. This is where your federal income tax is taken before the salary is paid to the employee. It is calculated by the amount you earn, and the information provided on a W-4 form.
It is also worth noting that some states have additional state tax (on top of federal taxes) and this can also be deducted from an employee’s salary through tax withholding.
No, you don’t need an American bank account to register your business. However, it will speed up the process. You don’t need to be an American citizen to set up a bank account there, so it might be worth it to make your payroll processes easier.
Officially, America follows a traditional western working week of 9 – 5, Monday to Friday. Unofficially, many Americans work more than this. The average office employee in the US works at least 50 hours per week.
Any employee that works more than 40 hours may expect overtime, which can be payable at 1.5 times their usual salary.
Hiring someone in the US can be a little costly, it is expected to be around 1.3 times the annual salary of an employee to bring on a new hire.
US Wages and Pay
As the US is so large, wages can differ between federal and state governed amounts, and it can get a little bit complicated to follow (especially when hiring people across multiple states). But we’ve got a run down of all the federal and state minimums on employees pay that you need to know.
Federal Minimum Wage
The federal minimum wage is set out by the government in the US, and every state must provide it, unless they decide to create a higher state minimum.
The current minimum wage is: $7.25 for most employees.
But not everyone in the US qualifies for the minimum wage. Anyone who works is a role which receives tips have a lower minimum wage. This can be jobs like servers, bartenders, hotel workers or taxi drivers (among many others).
These employees have a minimum wage of $2.13 per hour. The amount in tips plus the $2.13 must reach at least $7.25 per hour or the employer must make up the difference.
State Minimum Wage
Of the 50 states in the US, 30 of them have minimum wages which are higher than the federal rate.
US Taxes and Deductions
In the US, there’s a few different things which can be deducted from an employee’s wages before they receive it, and taxes are one of the biggest and most commonly occurring.
There are two types of income taxes that can be deducted – federal and state.
Federal tax rates are created by the government, and these apply to everyone.
In the US, your federal income tax rate is calculated based on your income and tax filing status. This means that the tax deducted can range from 10 – 37% (and this is before any state-taxes are also added).
The filing statuses are:
- Single
- Married filing jointly
- Married filing separately
- Head of Household
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,925 to $48,475 | $23,850 to $96,950 | $17,000 to $64,850 |
| 22% | $48,475 to $103,350 | $96,950 to $206,700 | $64,850 to $103,350 |
| 24% | $103,350 to $197,300 | $206,700 to $394,600 | $103,350 to $197,300 |
| 32% | $197,300 to $250,525 | $394,600 to $501,050 | $197,300 to $250,500 |
| 35% | $250,525 to $626,350 | $501,050 to $751,600 | $250,500 to $626,350 |
| 37% | $626,350 or more | $751,600 or more | $626,350 or more |
Many states in the US have state and local taxes which are deducted from salaries along with the federal taxes. Your state taxes will go to your local community services, education, transportation etc.
Along with taxes, employees have to contribute to Medicare and social security. Employees have to pay Social Security tax at a rate of 6.2% with a wage-based contribution limit, and they pay Medicare tax at 1.45% without any cap. This equals 7.65% in Federal Insurance Contributions Act (FICA) taxes per paycheck (until the Social Security wage base is reached), which you are legally obligated to match.
After all the tax and insurance payments, there can also be additional deductions from an employee’s paycheck. These include:
- Wage garnishments: courts and the Internal Revenue Service (IRS) can order you to withhold a portion of an employee’s wages to cover unpaid taxes, child support, alimony, or defaulted loans.
- Medical insurance: employees can pay insurance premiums through their wages.
- Retirement plans: 401k’s and Roth IRA’s can be deducted from an employee’s paycheck.
- Job related expenses: union memberships, uniforms, meals, and travel can be deducted from an employee’s paycheck. However, it is important to note that some states don’t allow this.
US Employee Benefits
Doing business in America, you’ll find that there are benefits which need to be provided to your employees, as well as a range of supplementary benefits you can offer. To many employees this is something which they look for during the recruitment process and can be equally as important as job role or salary.
Benefit requirements can vary from state to state but the most commonly occurring statutory benefits are medical insurance, retirement plans, paid sick or vacation leave and family or medical leave.
Medical insurance
There is currently no federal requirement to offer medical insurance. However, in some states medical insurance is something an employer is required to offer based on the company size.
As there is no universal healthcare in the US, many employees will expect a good health insurance plan to be offered by their employer to help cover any medical expenses that arise, and this is something they might negotiate in their contracts.
Right now, there are five states and one district where health insurance is required:
- Massachusetts
- New Jersey
- Vermont
- California
- Rhode Island
- District of Columbia (Washington D.C.)
Under the Affordable Care Act, employers with 50 or more full-time employees (or full-time equivalents) must provide health insurance coverage to 95% of their full-time employees. If they fail to meet this requirement, they’ll owe a penalty to the IRS. (Employees who work 30 or more hours per week are considered full-time.)
Retirement plans
Preparing for retirement can be vital to many employees. But in the US, there is currently no federal mandated retirement plan. Many states do have a mandate which employers must follow based on number of employees, length of time in the business and current retirement program.
Complementary benefits
Many companies in the US will offer additional benefits to insurance and pensions, and these can be the selling point for many employees when looking at a accepting a job.
Some of the complementary benefits you might find in the US are:
- Dental insurance
- Life insurance
- Flexible Spending Accounts or Health Savings Accounts
- Paid leave
- Flexible schedules
- Education assistance – college grants or paid training
- Hiring bonuses
- Living stipends
- Travel expenses
- Maternity Leave
US Leave Policies
Sick Leave
Sick leave is a bit of a tricky one, as there is no federal sick leave policy for short term illness and employers don’t have to offer time off (or pay) when an employee calls in to work unwell. However, under the Family and Medical Leave act (FMLA) employees will be covered to take unpaid leave for long-term illness.
Some cities and states do however offer sick leave to employees.
Family and Medical Leave Act (FMLA)
FMLA is an act which allows eligible employees to take unpaid, job-protected leave for specified family or medical reasons. Whilst employees are on family or medical leave, they must remain under health insurance coverage at the same conditions as if they had not taken leave.
FMLA applies to employers with over 50 employees.
The entitlement under FMLA is:
- The birth of a child, and to care for the newborn child within one year of birth.
- The placement with the employee of a child for adoption or foster care, and to care for the newly placed child within one year of placement.
- To care for the employee’s spouse, child or parent who has serious health conditions.
- A serious health condition that makes the employee unable to perform the essential functions of their job.
- Any qualifying urgent matter arising out of the fact that the employee’s spouse, child, or parent is covered military member on covered active duty.
Caring for a covered service member with a serious injury or illness if the eligible employee is the service members spouse, child, parent or next of kin.
Hiring in a specific state? Here’s what you need to know.
US legal entity set up
When launching an overseas presence for your business, you will always be faced with a choice. In the US, you can create an American branch of an existing business or create a subsidiary company.
The best way to open a branch in the US is to apply as a C Corporation. A C Corporation works by paying a flat business tax rate of 21%, regardless of annual profit. Any dividends paid to members of a C Corporation are also taxable on their individual tax return—this ‘double taxation’ is considered a negative element of opening a branch in the US. Corporations are also more tightly regulated by the authorities.
Your other option is to create a subsidiary business. This is known as a Limited Liability Company, or an LLC. The owner of an LLC is not personally responsible for any debts or legal difficulties incurred by the business, and all directors are known as members
Entity set-up FAQs
None! There is no minimum share capital requirement for creating a LLC, C Corporation or an S Corporation. However, if you want citizenship as part of your business enterprise, then you need to invest $1 million to qualify for an EB-5 green card.
Yes! Unless stated otherwise in a contract or the employee is part of a labour union, contracts can be terminated at will in the US, provided it is not for an illegal reason. This is a double-edged sword, as it also allows employees to resign without notice. Employees can still make claims for unfair dismissal, so ensure you have good reason to terminate a contract. If making mass redundancies or liquidating a business, it is considered good practice to offer 60 days’ notice to employees.
The Medicare tax is withheld from an employee’s salary. This is a contribution to America’s national health program. The rate of Medicare tax is assigned by the IRS, but it’s typically 1.45% of a salary. All employees and business owners must pay the Medicare tax, regardless of income.
There are two types of entrepreneur Visa available to British business owners looking to establish themselves in the US. Both last for five years at a time. The E-1 Visa is available to British business owners that can show that 50% of more of their custom comes from the United States.
The E-2 Visa, meanwhile, is based upon an international treaty between the UK and US governments. To qualify for an E-2 Visa, you’ll need to prove that you are making a substantial investment into an American business and will be able to support yourself while also hiring local employees.
You could also apply for an L-1 Visa if you can prove that your SME will benefit the American economy. This Visa will initially be restricted to just one year, though. You will need to apply for an extension after this period. The success of this application will depend upon the financial performance of your business.
A green card is a permit that allows a foreign national to permanently live and work in the US. You can earn a green card as a skilled employee of a US business. If you wish to gain a green card as a business owner rather than an employee, you have four options:
- An EB-1 green card is awarded to business owners looking to start an American enterprise. This green card is very hard to gain. You will need to demonstrate exceptional skills and experience.
- An EB-2 green card is a more popular choice. This is the green card awarded to exceptional employees, such as those with advanced educational qualifications or unique skill sets that supersede those of American applicants. Application for an AB-2 green card requires a National Interest Waiver.
- As a small business owner, you can apply for an NIW yourself rather than doing so through an employer. To qualify for an NIW, you’ll need to prove that your business will benefit the US— economically, socially and ethically.
- If you’re wealthy, you can buy your way into American residency by applying for an EB-5 green card. This is a green card designed for investors. It will be awarded to anybody that can prove their business can offer ten sustainable, full-time jobs to American citizens.The catch is that you’ll also need to invest a minimum of $1m of your own money into this venture. In areas with high levels of unemployment and limited working opportunities, you may be able to negotiate this down to $500,000.
Country nuances
- There is a firm belief that time is money.
- Punctuality is critical, as is meeting deadlines. US business partners value efficiency above all else.
- Achievements and ability matter more than age, seniority, or length of service.
- You will often be expected to be available at all hours when doing business in America.
Interested in expanding into the US?
Want to find out more about Cintra Global? We’d love to hear about your global expansion plans and tell you about how we can support you with your international payroll, HR, and expansion needs.