A compliance guide to US payroll A compliance guide to US payroll

A compliance guide to US payroll
23 Aug 2018

Because there is no single, unified set of global payroll laws covering the entire world, it is necessary for global payroll professionals to keep up to date with regional or national accounting and tax regulations, which can be very different depending on where the organisation decides to set up shop. Since such regulations vary widely in terms of complexity and the cost of compliance, global payroll management is inevitably both difficult and time-consuming. 

But one country that is popular in expansion terms, seeing that it is the largest economy in the world, is the US. If deciding to create a presence there, it is important to review the most significant regulations that are likely to affect your payroll strategy. These include laws pertaining to income tax, the minimum wage, overtime pay and employee benefits.

To help get you started, here is an overview of each area:

Income tax

Organisations operating in the US must withhold income tax from their US-based employees. The tax rate, which is established at the federal level on an annual or as-needed basis, varies depending on an individual’s income and whether it is necessary to make deductions for a spouse or dependents.

Employers are responsible for submitting staff taxes to the Internal Revenue Service (IRS), which is a bureau of the US Department of the Treasury. Taxes must be submitted according to the IRS’s deposit schedule, which is based on a company’s total tax liability for the withholding period.

It is also necessary to withhold income taxes at a state level, including in Puerto Rico and Washington DC. The exceptions though are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming.

Employers must also pay additional federal and state taxes under the Federal Unemployment Tax Act as well as various state unemployment taxes in order to help fund state-sponsored workforce agencies.

Minimum wage

Some states, such as Alaska and California, have their own minimum wage laws, which can conflict with the federal minimum. In this instance, employers must use whichever rate of pay is highest. The same holds true in the case of working hours if state law differs from federal law.

The Fair Labour Standards Act (FLSA), which lays out minimum wage and other employment rules, does not regulate employment issues that are a matter of agreement between employees and their employer, including the designation of full- versus part-time employment status, holidays, schedules or benefits. Despite this situation, organisations are still required to follow federal laws relating to the minimum wage, overtime pay and employer record-keeping practices.

Overtime pay

In the US, if employers require or permit their employees to work overtime, they are generally required to pay them at a premium rate. Staff members who are covered by the FLSA are entitled to receive overtime pay if they work for more than 40 hours in a given working week, or at least 1.5 times their regular pay rate. The FLSA does not require overtime to be paid for work undertaken on Saturdays, Sundays, holidays or regular days of rest, unless overtime has been worked on those days.

Social security and Medicare insurance

The Federal Insurance Contributions Act  requires US employers to withhold social security and Medicare  contributions from employees’ salaries. Rate and wage limits are subject to change annually in the case of withholding. The maximum limit in terms of taxable wages for social security contributions in 2018/19 was set at US$128,400. 

For both employers and employees, the Medicare payroll tax rate is 1.45% on all earnings. This brings the total social security and Medicare payroll withholding rate to 7.65% each. Only the social security portion (6.2%) is limited to the US$128,400 maximum taxable amount.

Organisations operating in the US must also pay a matching contribution based on the same percentage and wage limit withheld by the employee. Employers must then work out the total amount of tax liability they owe during the withholding period, before submitting the withholding and contribution amount to the IRS via an electronic funds transfer.

Vacation allowance

US workers are not legally entitled to paid holiday as, technically, there is no law that obliges employers to offer it. But in practice, the majority of US employers do provide paid holiday to their staff. The amount of paid holiday they receive varies from employer to employer but, as a rule of thumb, it usually amounts to at least 10 days of paid vacation each year.

Sick pay

While again there is no federal law mandating sick leave, many states and cities do require it to be offered to workers by law. For instance, the state of Massachusetts mandates that organisations offer their staff five days of paid sick leave. In reality, most US organisations provide something, although it also does vary from employer to employer.

Maternity pay

US workers are not entitled to paid maternity leave. Instead, parental leave is considered a benefit to be provided by employers. The Family and Medical Leave Act ensures that employees can take time off - this is up to 12 weeks for mothers - without losing their jobs or access to their health insurance, but organisations have no obligation to pay them during this time.  As a result, maternity leave varies from employer to employer.

Payroll record keeping

Once an employee joins the company, it is necessary to retain their payroll documents for three years. These documents include employment contracts providing their full name, address and social security number as well as I-9 employment eligibility verification forms, time cards and payment records.

Most states follow federal data retention guidelines, but a few, such as California, New York, Illinois, and Washington, have enacted specific legislation that affects what payroll records should be retained and how long they should be kept. For example, in California and New York, the minimum retention period is six years.

 Rick Hammell

Rick Hammell is chief executive of employer of record organisation, Elements Global Services. He developed and grew the organisation following a split from its parent company, where he served initially as HR director for a short period before becoming vice president and chief operating officer. Rick holds a Bachelors degree in Business Administration with a focus on HR and journalism as well as an SPHR certification.

 

Because there is no single, unified set of global payroll laws covering the entire world, it is necessary for global payroll professionals to keep up to date with regional or national accounting and tax regulations, which can be very different depending on where the organisation decides to set up shop. Since such regulations vary widely in terms of complexity and the cost of compliance, global payroll management is inevitably both difficult and time-consuming. 

But one country that is popular in expansion terms, seeing that it is the largest economy in the world, is the US. If deciding to create a presence there, it is important to review the most significant regulations that are likely to affect your payroll strategy. These include laws pertaining to income tax, the minimum wage, overtime pay and employee benefits.

To help get you started, here is an overview of each area:

Income tax

Organisations operating in the US must withhold income tax from their US-based employees. The tax rate, which is established at the federal level on an annual or as-needed basis, varies depending on an individual’s income and whether it is necessary to make deductions for a spouse or dependents.

Employers are responsible for submitting staff taxes to the Internal Revenue Service (IRS), which is a bureau of the US Department of the Treasury. Taxes must be submitted according to the IRS’s deposit schedule, which is based on a company’s total tax liability for the withholding period.

It is also necessary to withhold income taxes at a state level, including in Puerto Rico and Washington DC. The exceptions though are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming.

Employers must also pay additional federal and state taxes under the Federal Unemployment Tax Act as well as various state unemployment taxes in order to help fund state-sponsored workforce agencies.

Minimum wage

Some states, such as Alaska and California, have their own minimum wage laws, which can conflict with the federal minimum. In this instance, employers must use whichever rate of pay is highest. The same holds true in the case of working hours if state law differs from federal law.

The Fair Labour Standards Act (FLSA), which lays out minimum wage and other employment rules, does not regulate employment issues that are a matter of agreement between employees and their employer, including the designation of full- versus part-time employment status, holidays, schedules or benefits. Despite this situation, organisations are still required to follow federal laws relating to the minimum wage, overtime pay and employer record-keeping practices.

Overtime pay

In the US, if employers require or permit their employees to work overtime, they are generally required to pay them at a premium rate. Staff members who are covered by the FLSA are entitled to receive overtime pay if they work for more than 40 hours in a given working week, or at least 1.5 times their regular pay rate. The FLSA does not require overtime to be paid for work undertaken on Saturdays, Sundays, holidays or regular days of rest, unless overtime has been worked on those days.

Social security and Medicare insurance

The Federal Insurance Contributions Act  requires US employers to withhold social security and Medicare  contributions from employees’ salaries. Rate and wage limits are subject to change annually in the case of withholding. The maximum limit in terms of taxable wages for social security contributions in 2018/19 was set at US$128,400. 

For both employers and employees, the Medicare payroll tax rate is 1.45% on all earnings. This brings the total social security and Medicare payroll withholding rate to 7.65% each. Only the social security portion (6.2%) is limited to the US$128,400 maximum taxable amount.

Organisations operating in the US must also pay a matching contribution based on the same percentage and wage limit withheld by the employee. Employers must then work out the total amount of tax liability they owe during the withholding period, before submitting the withholding and contribution amount to the IRS via an electronic funds transfer.

Vacation allowance

US workers are not legally entitled to paid holiday as, technically, there is no law that obliges employers to offer it. But in practice, the majority of US employers do provide paid holiday to their staff. The amount of paid holiday they receive varies from employer to employer but, as a rule of thumb, it usually amounts to at least 10 days of paid vacation each year.

Sick pay

While again there is no federal law mandating sick leave, many states and cities do require it to be offered to workers by law. For instance, the state of Massachusetts mandates that organisations offer their staff five days of paid sick leave. In reality, most US organisations provide something, although it also does vary from employer to employer.

Maternity pay

US workers are not entitled to paid maternity leave. Instead, parental leave is considered a benefit to be provided by employers. The Family and Medical Leave Act ensures that employees can take time off - this is up to 12 weeks for mothers - without losing their jobs or access to their health insurance, but organisations have no obligation to pay them during this time.  As a result, maternity leave varies from employer to employer.

Payroll record keeping

Once an employee joins the company, it is necessary to retain their payroll documents for three years. These documents include employment contracts providing their full name, address and social security number as well as I-9 employment eligibility verification forms, time cards and payment records.

Most states follow federal data retention guidelines, but a few, such as California, New York, Illinois, and Washington, have enacted specific legislation that affects what payroll records should be retained and how long they should be kept. For example, in California and New York, the minimum retention period is six years.

 Rick Hammell

Rick Hammell is chief executive of employer of record organisation, Elements Global Services. He developed and grew the organisation following a split from its parent company, where he served initially as HR director for a short period before becoming vice president and chief operating officer. Rick holds a Bachelors degree in Business Administration with a focus on HR and journalism as well as an SPHR certification.