A global employer’s guide to U.S. payroll taxes

Looking at expanding your multinational business to the U.S.? You’re in good company. 

The U.S. is more than a reliable, developed nation—it’s the largest consumer market in the world and currently holds 25% of the global GDP. It’s a resource for business growth, innovation, and talent that companies shouldn’t overlook.

The downside is there’s no shortage of tax burdens in the United States. And employers are often the ones tasked with collecting and making tax payments, for everything from sales tax to payroll taxes.

Payroll taxes include statutory payments withheld through the payroll process and paid to tax authorities by the company on behalf of individual employees. It’s a necessary enforcement process that ensures employees are paying what’s owed.

For global businesses, there’s a bit of a learning curve when it comes to figuring out U.S. payroll taxes. 

Here’s a quick guide to get you started.

Why the U.S. is worth the effort

If you’re contemplating growing into U.S. markets, it’s probably a smart decision. Here’s why global employers consistently choose the U.S. for economic opportunity.

  • The U.S. is a strong, resilient economy.
  • The culture is focused on developing a strong work ethic.
  • There’s a large pool of highly-skilled workers from top universities.
  • There’s plenty of natural resources.
  • The U.S. is geographically connected to the world with ample port access.
  • The U.S. is a world leader in innovation.

U.S. income taxes explained

There are two main types of income tax in the United States—federal and state. Federal income tax rates in the U.S. vary between 0% and 37% based on income. An additional burden of 0% - 8.3% is levied at the state level.

Most employers need to withhold estimated tax payments for both federal and state taxes through the payroll process and send them to the Internal Revenue Service (IRS). The exception is a few states that don’t require state income tax—like Florida, Texas and New Hampshire.

The amount of taxes withheld varies depending on the individual’s income and tax bracket. Graduated tax brackets are common at the state and federal levels with the lowest earners paying fewer dollars in taxes. The bigger income tax burdens go to higher earners. 

Monthly, quarterly, and annual reporting requirements also vary by state and federal mandate. Generally, employers are required to reconcile their wages and tax liabilities at least quarterly, providing tax payments to the appropriate state and federal governments. 

Related Content: Scalable global hiring for hypergrowth companies

FICA taxes for social security and Medicare

Beyond income taxes, employers and employees will also be responsible for paying into social security and Medicare. The Federal Insurance Contributions Act (FICA) is a federal mandate that requires employees and employers to contribute to both social security and Medicare.

Social security covers benefits for the elderly, survivors, and disabled. All workers and their employers pay into the social security system so that funds are available when workers need them. Social security is 12.4% of the employee’s salary, split equally between employer and employee. The employer is required to pay 6.2%, and the employee pays 6.2% through payroll taxes. 

Medicare taxes go to a separate FICA fund designed to cover medical expenses for the elderly or disabled. The 2.9% withholding is also split equally between the employer and the employee (totaling 1.45% each).

How to calculate U.S. payroll taxes

You may have noticed that payroll taxes are expressed in percentages of an employee’s pay. Employers are tasked with calculating appropriate withholdings and tax payments for each employee during each unique payroll cycle. 

You’ll use gross wages to calculate payroll taxes, including:

  • Hourly wages
  • Overtime pay
  • Sick and vacation pay
  • Bonus payments
  • Commissions
  • Tips

There’s no federal requirement on how often you need to pay your U.S. employees, but bi-weekly is one of the most common. 

Most entry-level workers and those without subordinates are paid on an hourly basis with minimum wage requirements enforced at both the state and federal levels. Professional positions and management roles are often salaried positions. This means their rate of pay is not variable based on the hours worked in a pay period. 

Employer tax reporting requirements

Employers are required to file tax form W-2 for each payroll employee on an annual basis. These forms report income to the federal and state taxing authorities and provide a record of tax payments to the employee. Employees use these forms to reconcile their taxes every year by April 15. 

W-2 forms must be sent out to all payroll employees by January 31 for the preceding tax year. Additional fines may be imposed for errors and corrected W-2 forms.

States have a say in payroll compliance

There are 50 individual states within the United States. While some things are mandated on a federal level, most of the control is at the state level. You’ll want to take a close look at the business environment and regulations from one state to another before deciding where to set up shop. 

For example, new hire reporting requirements are decided at the state level, as is whether employers are required to make final wage payments by a certain date.

Hiring workers in the U.S.

Individuals must be legally authorized to work in the U.S. The burden falls on employers to demonstrate that they have made a reasonable effort to comply with this mandate. The U.S. government requires employers to complete a form I-9, verification for eligibility of employment for every new hire. 

To be eligible to work in the U.S., you must be one of the following:

  • A U.S. citizen
  • A lawful permanent resident
  • A documented immigrant on a temporary worker visa

You’ll also collect information on tax withholding elections for each new employee. This tells you how many dependents each employee has and their filing status so that you can accurately calculate their payroll taxes. A good payroll system will include fields for recording these details and automating your payroll tax calculations during each cycle. 

The takeaway on U.S. payroll taxes

As a global employer, you’re probably familiar with various statutory payments that affect your payroll processing. Many countries around the world have social benefit programs that are funded through taxation. 

Although the U.S. often favors privatization (e.g. healthcare, insurance, etc.), the country does use a payroll tax system to collect required payments at the state and federal levels. To take advantage of all the economic benefits the U.S. has to offer, you need to know which payroll taxes are required and how to calculate these withholdings.

But payroll taxes are just one aspect of hiring in new countries. If you’re growing globally, don’t miss this video: How to achieve rapid expansion into new international markets

 

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