Achieving payroll success in the US Achieving payroll success in the US

Achieving payroll success in the US
30 Apr 2015

The goal of any multi-national organisation is to expand to the regions and markets offering opportunities for robust business growth.

Not only must they find locations that provide a large consumer base, but also the qualified talent, which can carry out the company mission and serve as ambassadors of the global brand. As the largest economy in the world, the United States offers multinational companies access to both.

As trade barriers have been reduced in recent years, international organisations will have an easier time than ever setting up US operations. But, it won’t all be smooth sailing. The US has a complex regulatory landscape surrounding employment laws and payroll.

Many of the laws are established at the state level, conflicting with federal laws, which further complicates the issue. For example, individual states and even cities may set their own minimum wage rates higher than those established by the government. Given these complexities, a solid understanding of US payroll regulations and how to comply with these laws is essential.

Employment laws

Labour guidelines are established by the Fair Labour Standards Act (FLSA), which outlines the many key factors of employing and compensating workers. It is important to note that many states have enacted their own laws on top of those set by the FLSA. In these cases, whichever regulation benefits workers the most should be followed.

For example, the FLSA has set the national minimum wage at $7.25 per hour, but many states and cities have enacted a higher minimum hourly rate. Companies must follow the local legislation in these circumstances.

Although there are 10 national holidays in the country, the government does not require these to be paid holidays. Additionally, FLSA does not mandate paid leave for workers, although the Family Medical Leave Act (FMLA) allows employees to take up to 12 weeks of unpaid leave for certain medical conditions.

Employee income tax

Employers hiring employees in the US are expected to withhold income tax from their workers. The tax rate is set at the federal level and is based on a progressive scheme ranging from 10 per cent to 39.6 percent (for the year 2015) for the highest earners, while taking into account deductions for a spouse and dependants.

The federal government may change these tax ranges on an annual or as-determined basis. Employee taxes must then be submitted to the Internal Revenue Service (IRS), the tax-collecting agency of the US Department of the Treasury, according to the IRS’s deposit schedule based on the employer’s total amount of tax liability for the withholding period.

Employers are also required to file a quarterly reconciliation (Form 941) at the end of every quarter, file the annual form W-3 with the Social Security Administration (SSA) and provide a Form W-2, the annual wage and tax statement, to all employees by 31 January of each year.

In addition to federal income taxes, employers operating in most states, as well as Puerto Rico and Washington, DC, are also required to withhold state income taxes. This includes all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington State and Wyoming.

On top of paying employee income taxes, companies operating in the USA must also contend with employer paid taxes at the federal level, under the Federal Unemployment Tax Act (FUTA), as well as various state unemployment tax requirements.

Social security and Medicare (FICA) contributions

Employers operating in the USA are required to withhold contributions for social security and Medicare from their employees’ pay cheques, as directed by the Federal Insurance Contributions Act (FICA).

For the year 2015, employers withhold 6.2 per cent of each employee’s taxable wages for social security and 1.45 percent for Medicare. The taxable wage base limit for social security is $118,500 and there is no wage base limit for Medicare, for which the rates and wage limits are subject to change annually.

The employer is required to contribute a matching amount for these contributions, which must then be submitted to the IRS via electronic funds transfer (EFT) based on the employer’s total amount of tax liability for the withholding period.

Compensating employees

Another area in which state laws override the federal government law is when it comes to the frequency of payments to paying employees. There is no federal government-directed standard for frequency of payments - the state-level requirements take precedence.

Federal law doesn’t require termination pay beyond what the employee has earned during that pay period up until their termination. Most states require that terminated employees be compensated for unused time off if it has been earned or accrued and the employer has a stated or written policy in place for such situations.

Creating a successful approach

Given the complexities of US payroll, variances between state and federal laws and the significant fines and penalties for organisations that fail to comply, the right strategy is essential.

But rather than trying to navigate the complex payroll landscape on their own, employers looking to expand to the US will benefit from working with a payroll provider experienced with the nuances of US payroll laws. As a result, they can confidently hire and compensate employees in the USA and anywhere around the globe.

The goal of any multi-national organisation is to expand to the regions and markets offering opportunities for robust business growth.

Not only must they find locations that provide a large consumer base, but also the qualified talent, which can carry out the company mission and serve as ambassadors of the global brand. As the largest economy in the world, the United States offers multinational companies access to both.

As trade barriers have been reduced in recent years, international organisations will have an easier time than ever setting up US operations. But, it won’t all be smooth sailing. The US has a complex regulatory landscape surrounding employment laws and payroll.

Many of the laws are established at the state level, conflicting with federal laws, which further complicates the issue. For example, individual states and even cities may set their own minimum wage rates higher than those established by the government. Given these complexities, a solid understanding of US payroll regulations and how to comply with these laws is essential.

Employment laws

Labour guidelines are established by the Fair Labour Standards Act (FLSA), which outlines the many key factors of employing and compensating workers. It is important to note that many states have enacted their own laws on top of those set by the FLSA. In these cases, whichever regulation benefits workers the most should be followed.

For example, the FLSA has set the national minimum wage at $7.25 per hour, but many states and cities have enacted a higher minimum hourly rate. Companies must follow the local legislation in these circumstances.

Although there are 10 national holidays in the country, the government does not require these to be paid holidays. Additionally, FLSA does not mandate paid leave for workers, although the Family Medical Leave Act (FMLA) allows employees to take up to 12 weeks of unpaid leave for certain medical conditions.

Employee income tax

Employers hiring employees in the US are expected to withhold income tax from their workers. The tax rate is set at the federal level and is based on a progressive scheme ranging from 10 per cent to 39.6 percent (for the year 2015) for the highest earners, while taking into account deductions for a spouse and dependants.

The federal government may change these tax ranges on an annual or as-determined basis. Employee taxes must then be submitted to the Internal Revenue Service (IRS), the tax-collecting agency of the US Department of the Treasury, according to the IRS’s deposit schedule based on the employer’s total amount of tax liability for the withholding period.

Employers are also required to file a quarterly reconciliation (Form 941) at the end of every quarter, file the annual form W-3 with the Social Security Administration (SSA) and provide a Form W-2, the annual wage and tax statement, to all employees by 31 January of each year.

In addition to federal income taxes, employers operating in most states, as well as Puerto Rico and Washington, DC, are also required to withhold state income taxes. This includes all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington State and Wyoming.

On top of paying employee income taxes, companies operating in the USA must also contend with employer paid taxes at the federal level, under the Federal Unemployment Tax Act (FUTA), as well as various state unemployment tax requirements.

Social security and Medicare (FICA) contributions

Employers operating in the USA are required to withhold contributions for social security and Medicare from their employees’ pay cheques, as directed by the Federal Insurance Contributions Act (FICA).

For the year 2015, employers withhold 6.2 per cent of each employee’s taxable wages for social security and 1.45 percent for Medicare. The taxable wage base limit for social security is $118,500 and there is no wage base limit for Medicare, for which the rates and wage limits are subject to change annually.

The employer is required to contribute a matching amount for these contributions, which must then be submitted to the IRS via electronic funds transfer (EFT) based on the employer’s total amount of tax liability for the withholding period.

Compensating employees

Another area in which state laws override the federal government law is when it comes to the frequency of payments to paying employees. There is no federal government-directed standard for frequency of payments - the state-level requirements take precedence.

Federal law doesn’t require termination pay beyond what the employee has earned during that pay period up until their termination. Most states require that terminated employees be compensated for unused time off if it has been earned or accrued and the employer has a stated or written policy in place for such situations.

Creating a successful approach

Given the complexities of US payroll, variances between state and federal laws and the significant fines and penalties for organisations that fail to comply, the right strategy is essential.

But rather than trying to navigate the complex payroll landscape on their own, employers looking to expand to the US will benefit from working with a payroll provider experienced with the nuances of US payroll laws. As a result, they can confidently hire and compensate employees in the USA and anywhere around the globe.