January 21, 2022
Looking at expanding your multinational business to the U.S.? You’re in goodcompany.
The U.S. is more than a reliable, developed nation—it’s the largest consumermarket in the world and currently holds 25% of the global GDP. It’s aresource for business growth, innovation, and talent that companies shouldn’toverlook.
The downside is there’s no shortage of tax burdens in the United States. Andemployers 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 processand paid to tax authorities by the company on behalf of individual employees.It’s a necessary enforcement process that ensures employees are paying what’sowed.
For global businesses, there’s a bit of a learning curve when it comes to figuring outU.S. payroll taxes.
Here’s a quick guide to get you started.
If you’re contemplating growing into U.S. markets, it’s probably a smart decision. Here’s why global employersconsistently choose the U.S. for economic opportunity.
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 additionalburden of 0% - 8.3% is levied at the state level.
Most employers need to withhold estimated tax payments for both federal andstate taxes through the payroll process and send them to the Internal RevenueService (IRS). The exception is a few states that don’t require state incometax—like Florida, Texas and New Hampshire.
The amount of taxes withheld varies depending on the individual’s income andtax bracket. Graduated tax brackets are common at the state and federal levelswith the lowest earners paying fewer dollars in taxes. The bigger income taxburdens go to higher earners.
Monthly, quarterly, and annual reporting requirements also vary by state andfederal mandate. Generally, employers are required to reconcile their wagesand tax liabilities at least quarterly, providing tax payments to theappropriate state and federal governments.
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Beyond income taxes, employers and employees will also be responsible forpaying into social security and Medicare. The Federal InsuranceContributions Act (FICA) is a federal mandate that requires employees andemployers to contribute to both social security and Medicare.
Social security covers benefits for the elderly, survivors, and disabled. Allworkers and their employers pay into the social security system so that fundsare available when workers need them. Social security is 12.4% of theemployee’s salary, split equally between employer and employee. The employeris 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 expensesfor the elderly or disabled. The 2.9% withholding is also split equallybetween the employer and the employee (totaling 1.45% each).
You may have noticed that payroll taxes are expressed in percentages of anemployee’s pay. Employers are tasked with calculating appropriate withholdingsand tax payments for each employee during each unique payroll cycle.
You’ll use gross wages to calculate payroll taxes, including:
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 hourlybasis with minimum wage requirements enforced at both the state and federallevels. Professional positions and management roles are often salariedpositions. This means their rate of pay is not variable based on the hoursworked in a pay period.
Employers are required to file tax form W-2 for each payroll employee on an annual basis. These formsreport income to the federal and state taxing authorities and provide a recordof tax payments to the employee. Employees use these forms to reconcile theirtaxes every year by April 15.
W-2 forms must be sent out to all payroll employees by January 31 for thepreceding tax year. Additional fines may be imposed for errors and correctedW-2 forms.
There are 50 individual states within the United States. While some things aremandated on a federal level, most of the control is at the state level. You’llwant to take a close look at the business environment and regulations from onestate 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 certaindate.
Individuals must be legally authorized to work in the U.S. The burden falls onemployers to demonstrate that they have made a reasonable effort to complywith this mandate. The U.S. government requires employers to complete a form I-9, verification for eligibility of employment for everynew hire.
To be eligible to work in the U.S., you must be one of the following:
You’ll also collect information on tax withholding elections for each newemployee. This tells you how many dependents each employee has and theirfiling status so that you can accurately calculate their payroll taxes. A goodpayroll system will include fields for recording these details and automatingyour payroll tax calculations during each cycle.
As a global employer, you’re probably familiar with various statutory paymentsthat affect your payroll processing. Many countries around the world havesocial 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 paymentsat the state and federal levels. To take advantage of all the economicbenefits the U.S. has to offer, you need to know which payroll taxes arerequired and how to calculate these withholdings.
But payroll taxes are just one aspect of hiring in new countries. If you’regrowing globally, don’t miss this video: How to achieve rapid expansioninto new international markets