USA payroll and tax overview.

Your guide to doing business in the United States of America

Doing Business in the USA

The United States of America is the world’s largest consumer market, with a population of over 327 million people and a GDP of around $20 trillion. Comprised of 50 states across 3.8 million square miles of territory, the USA holds some of the world’s most prestigious business hubs, including Los Angeles, New York, Chicago, and Philadelphia. In the 20th century, supported by an abundance of natural resources, the United States industrialised rapidly, and emerged as a powerful global economic and political power. Today, the USA holds around 33% of the world’s wealth, and makes up around 25% of global GDP. Traditionally, important industries in the USA included manufacturing, automotive and agriculture, but in the 21st century, energy, IT, and high-technology products have played an increasingly important financial role. Over the past decade, economic growth in the USA has trended upwards (since the global crisis), backed by a low regulation business environment and stable political leadership. The United States is a founding member of the United Nations, a member of NATO and the G20, and was ranked 6 on the World Bank’s 2020 Ease of Doing Business Survey.

Why Invest in the USA?

There are plenty of reasons to regard the USA as an investment target, including:

  • Business strength: The United States wields unmatched global economic power and is experiencing a boom period. The US economy grew 3% in the second quarter of 2017, and forecasts predict that the trend will continue thanks to proposed decreases in regulation and tax. In New York, the United States hosts one of the world’s busiest business hubs.
  • Talented workforce: Doing business in the US offers access to a pool of highly skilled employees, and graduates of some of the world’s most prestigious universities. US culture values productivity and hard work, while its business institutions are modern and diverse.
  • Abundant resources: As the third-largest country in the world, the United States holds abundant natural resources - from timber and mineral deposits, to oil and gas. The diverse agricultural and livestock industries also contribute significantly to the United States’ economic profile.
  • Global location: The sheer size of the United States offers its businesses an advantageous global trading profile. Bordered by Mexico and Canada, the USA is a gateway to North, Central, and South America, while busy air and shipping links connect it to lucrative markets in Europe, Asia and the Middle East.
  • Research and innovation: The United States leads the world in cutting-edge technological and scientific achievement. With robust intellectual property protection, organisations in the United States innovate, research, and develop their products in a fertile business environment - and enjoy a range of support schemes from both government and commercial sources.

Foreign Direct Investment in the USA

The US is open and receptive to foreign investment. The economic and political stability underpins the investment opportunity for foreign investors. Increasingly with the emergence of multinational companies around the globe, many will seek to secure a stake in the lucrative US market.

Registering a Company and Establishing an Entity in the USA

All companies are required to have a legal entity established in order to process a payroll. An employer must have an Employer Identification Number (EIN) before remitting forms and withheld taxes to the IRS. Employers can apply for an EIN online using the IRS website, by calling 800-829-4933, or by faxing or mailing Form SS-4, Application for Employer Identification Number, to the IRS.

Employers must also register to pay federal taxes electronically through the Electronic Federal Tax Payment System.

Business Banking in the USA

It is mandatory to make payments to both employees and the authorities from an in-country bank account. Generally, banks are open to the public from 0900 to 1700 hours Monday to Friday, and 0900 to 1400 hours on Saturdays.

Working Days and Working Hours in the USA

The working week in the US is Monday to Friday; however, specific workdays and hours can vary based on the nature of the business.

The working day for commercial offices is usually eight hours, typically from 0800 or 0900 hours to 1600 or 1700 hours. Lunch breaks typically range from 30 minutes to one hour.

Basic Facts about the USA

The United States of America, or the United States, is located in North America, with most of its land mass bordered by Canada to the north and Mexico to the south. The US consists of 50 states, 16 territories and the District of Columbia. The island state of Hawaii lies in the Pacific Ocean.

The US government consists of a bicameral legislature, a judicial branch headed by the US Supreme Court and an elected president, all of which oversee the nation’s employment-related tax, labor and compensation and benefits laws. States, territories and localities also are given significant authority to enact laws affecting employment.

General Information

Full Name: United States of America

Population: 327.2 million (World Bank, 2018)

Capital: Washington DC

Major Language: English

Major Religion: Christianity

Monetary Unit: United States Dollars ($)

Main Exports: Computers and Electrical Machinery, Vehicles, Chemical Products

GNI per Capita: US $56,180 (World Bank, 2017)

Internet Domain: .us

International Dialling Code: +001

 

Dates are usually written in the month, day and then year sequence. For example, July 1 2015 or 7/1/2015 Numbers are written with a comma to denote thousands and a period to denote fractions. For example, $ 3,000.50 (three thousand dollars and fifty cents).

New Employees in the USA

New Hire reporting is required and reporting requirements vary by state. Go to the American Payroll Association website for more detail on New Hire reporting.

All U.S. employers are required to examine and verify the eligibility of each employee to be lawfully employed in the U.S., regardless of the immigration status of the employee. This includes U.S. citizens, permanent residents, and temporary foreign workers. To verify an employee’s status and to show that an employer has complied with the law, Form I-9, Employment Eligibility Verification must be completed for every employee.

Leavers in the USA

Some states may require a final wage payment to be issued within a certain timeframe. For more detailed information, visit the American Payroll Association website.

Income Tax & Social Security in the USA

Income Tax in the USA

In the US, income tax is charged at federal and state levels. At the federal level, employers must withhold income taxes from employee salaries - at graduated rates of 10%-37% depending on earnings. At the state level, 41 US states (including Puerto Rico and Washington DC) charge income tax on employee earnings - at rates set by the individual state legislatures. Wages generally subject to income tax in the US include salaries, vacation allowances, bonuses, commissions and fringe benefits.

Social Security in the USA

Under the Federal Income Contributions Act (FICA), social security and Medicare taxes are also due in the US. Both employers and employees contribute, and the tax must be withheld by employers from employees’ wages. FICA taxes include Old Age, Survivors, and Disability benefits (OASDI), which are charged at a rate of 6.2% for both employers and employees (12.4% total), and Medicare, which is charged at 1.45% for both employer and employee (2.9% total).

States are also required to participate in the federal unemployment insurance system - provided for by the Federal Unemployment Tax Act. Contributions, benefit amounts, and qualification requirements for unemployment insurance vary by state.

Reporting Tax in the USA

For federal taxes, employers file a quarterly Form 941 to reconcile all wages and taxes paid during the three-month periods of Jan-Mar, Apr –Jun, Jul-Sep and Oct-Dec. An annual Form 940 is filed to report and pay Federal Unemployment Taxes due.

Monthly, Quarterly and Year-End processes for state and local jurisdictions vary by Taxing authority. Go to the American Payroll Association website at www.americanpayroll.org and click on Web Links, State & Local Links for more details.

Should corrections have to be made to the W-2, the IRS will typically charge a penalty of $100.00 per corrected W-2. If there is a high volume of corrected W-2 the interest amount may not be as high.

Payroll in the USA

The United States does not impose a federal standard on how frequently employees should be paid - leaving it to state-level administrations to establish their own laws. Payroll regulations in the US do, however, apply at both the state and federal levels, and require businesses to withhold income tax and social security contributions from their employees during each pay-cycle. It is the responsibility of employers - in both SME, and enterprise payroll set-ups - to calculate and report tax to the Internal Revenue Service (IRS).

Currently, income tax rates in the US range from 0% (for the lowest earners) to 37% (for the highest earners). At the state level, tax rates are set by the local legislature (not all states may impose an income tax) and may range from 0%-8.3%.

Social security and Medicare contributions are also a factor during the payroll process and must be withheld by employers from employee wages. Contribution rates for old age, survivors, and disability insurance stand at 6.2% for employees (and 6.2% for employers), while employee contributions for Medicare stand at 1.45% (matched by 1.45% for employers). Unemployment insurance rates vary by state.

Navigating federal and state taxes in the United States can be complicated: with that in mind, foreign businesses often engage global payroll providers to help them achieve regulatory compliance and ensure the pay process is completed accurately and on time.