The United States is one of the world's most influential economies, with around 330 million people. It has been a global economic powerhouse for over a century, and naturally, when corporations seek to expand to new markets, the United States (US) tops the list.
According to the World Bank, the US ranks 55th for starting a business. However, starting a company varies from state to state and, in some cases, even by city. Each of the 50 states in the United States has its unique rules and regulations concerning payroll.
Payroll in the US plays a significant role as a vast population is salaried. The payroll policies and procedures of the US are pretty elaborate, and you’ll witness slight variations in the US payroll requirements when you move across states.
How is the Payroll Calculated in the US?
Salaried employees are typically paid a fixed rate each pay period, according to the United States Department of Labor (DOL). Furthermore, the majority of salaried employees are not eligible for overtime pay. Notably, the Department of Labor has unique overtime standards for salaried employees. So, check with your state labor board to see who is excluded from overtime protection regulations. If the paid employee is not excluded from overtime, they must be paid for extra hours.
Divide the annual salary by the total number of pay periods yearly to get a salaried employee's pay per pay period. For example, suppose they make $64,000 a year and are paid semi-monthly.
$64,000 divided by 24 semi-monthly pay periods equals $2,666.67 (semi-monthly salary).
It is vital to take mandatory deductions out of your gross income as it is mandated by the payroll rules and regulations of the US. Payroll taxes, such as federal income tax, Social Security tax, and Medicare tax, are included. If your state has an income tax, be sure to withhold that. You can either use payroll software to calculate the tax or do it manually.
If you choose the latter, visit the Internal Revenue Service's Circular E (Employer's Tax Guide) for the relevant tax year and calculate the federal income tax amount using the employee's W-4 form, which varies by employee. State income tax (if applicable) is calculated using the employee's state income tax form and state withholding tax tables. The Payroll tax in the US forms a crucial component of the payroll and must be deducted.
Important Elements of Salary Structure in the USA
According to the standard payroll rules and regulations in the US, the salary is divided into different components. Some essential elements of the salary structure in the US, according to the payroll rules and regulations in the US, are:
- ~Employee Information
- ~Hours Worked
- ~Salaries and Wages
- ~Net and Gross pay
You'll need certain information from your employees before you can conduct payroll. Each employee must complete a form W-4. This form provides information on their federal income tax withholding and personal information such as their address, name, and Social Security number. This data is essential to execute payroll and deliver payroll correctly. This is one of the most crucial elements of the US payroll requirements.
If you have hourly employees, you'll need to keep track of how many hours they work. It will ensure that your employees are paid on time and accurately. However, if you have salaried staff, you still need to track their hours to ensure they input the correct hours.
Salaries and wages
Salary is a fixed sum paid to an employee. In most cases, an employee's annual compensation is divided by the number of yearly pay periods.
For instance, if the yearly salary is $28,600 and the pay cycle is per week. The paycheck will be credited for $550 before accounting for any deductions.
Wage refers to the amount you pay your employees based on the number of hours they work. You must define a specific pay rate for each hourly employee and then multiply the pay rate by the employee's number of hours to get that employee’s total wage.
Overtime pay is required for all non-exempt employees. You must consider both salaried and hourly employees. Only after an employee has worked 40 hours in a week will they be eligible for overtime. You can calculate the overtime compensation by multiplying the regular pay rate by 1.5.
It's a form of remuneration. Health insurance, educational help, retirement programs, and employee discounts are just a few available perks. Any benefits provided must be factored into the payroll. Some perks are also taxed. Paid personal time off, cash bonus pay, and corporate vehicles are all examples of taxable fringe benefits.
Employees can also have a secondary source of income. Service workers, for example, maybe compensated with tips. Employees must disclose all earned tips to you, subject to payroll taxes. Other pay is considered when you pay your staff commission or bonus. When you pay under the US payroll process, these wages are included.
Anything that is deducted from the total income of the employees is called a deduction. There are two types of deduction:
- ~Payroll Taxes in the US
Payroll taxes must be deducted from the wages of every employee. The amount withheld varies for each employee and is based on total earnings and information on Form W-4.
Payroll taxes comprise the following items:
Federal income tax, state income tax, local income tax, federal unemployment tax, state unemployment tax, Medicare tax, and Social Security tax are all imposed by the federal government.
A garnishment is a special deduction mandated by a court order. It's used to settle an employee's past-due debt. Garnishment is used to pay off an employee's past-due obligation. You can be ordered to withhold money from an employee's paycheck to pay for defaulted loans, unpaid taxes, and overdue child support. An employee’s wage garnishment ceiling is set by federal law according to their total income.
How to Set Up the US Payroll Process?
Payroll in the US means that all the transactions will be in US dollars. A 35% flat rate applies to the companies' taxable income.
Employers are required to deduct federal income tax from employee earnings and remit the tax to the IRS. They must also pay federal, state, and local unemployment taxes and social security taxes.
A sales tax is also collected in about 45 states, and the rates for each state are different.
A 30% withholding tax is applied to the gross amount of dividends, interest, and royalties. This tax applies to any other income, profit, or gain that is "fixed or determinable, annual or periodic" (FDAP).
A Step-by-step Process of Payroll Processing in the US
Listed below are the few steps that must be taken care of while processing the payroll in the US:
- Decide the employee's gross pay
You'll start by calculating the gross salary for each employee. Gross pay is the total amount you owe them, minus any deductions or withholdings.
So, how do you figure out your employees' gross pay? It all depends on whether or not your employee is hourly or salaried. It would be best to multiply the total hours worked during the pay period by the hourly rate for hourly employees. You must divide the annual compensation of salaried personnel by the number of pay periods you have throughout the year.
The following must be included in the gross wage:
- ~Pay for overtime
- ~Bonuses/commissions/tips/sick leaves & vacation pay
- ~You must add any of these to your employee's base salary if they occur during a pay period.
- Calculate all deductions
Employees are not entitled to their gross salary. Many deductions must be calculated on the employer side, including federal, state, and municipal income taxes and payroll taxes. Social Security and Medicare taxes (FICA taxes), state unemployment taxes (SUTA taxes), and federal unemployment taxes (FUTA) are all included in the payroll tax in the US.
As a result, if you recruit a new employee, you must gather the required initial forms, as this information will be used to calculate the withholding tax you will need.
Additionally, if employees contribute to a retirement savings plan, health insurance, or other benefits, such contributions must be taken from their compensation.
- Distribution of payments
It is now time for your employees to receive the money they are owed at this stage. You'll either send them to paychecks or make direct transfers.
- Make all the tax deposits
You must pay payroll tax to the IRS once you have paid your employees. The amount taken from employees for federal income tax, the amount withheld from Social Security and Medicare, and the amount you owe for Medicare Taxes and Social Security is included in these deposits.
Depending on the amount of your payroll, these payments are made semi-weekly or monthly. Using the IRS's online filing system, payroll taxes are generally simple to file.
Previously, form 8109 was used by employers for filing their federal taxes. The IRS, however, stopped doing so in 2011, and now all business owners must make federal tax deposits electronically. You will also need to make your state income tax deposit based on the state's regulations.
- Register everything in the payroll register
For your payroll, you'll need to retain accurate payroll processing records. A payroll register is a sheet that lists the following information for each employee:
- ~Gross salary in total
- ~Each deduction's total and type
- ~Net pays in total
Medicare and Social Security taxes are included in payroll taxes. Together, these taxes make up the FICA taxes. Medicare tax dollars are used to give medical benefits to adults over 65. However, social security taxes support benefits for retirees, retirees' dependents, and specially-abled people & their dependents.
While half of FICA taxes will be taken from employee paychecks, you will pay the other half as an employer. Self-employed people (business owners/entrepreneurs, etc.) also must pay federal payroll taxes. Thus, they pay self-employment tax instead of FICA tax.
The frequency with which you pay your employees is called payroll frequency or the payroll cycle. Usually, employers follow a payroll schedule to know when to pay each employee.
The four most prevalent pay frequencies in the United States are:
- ~Twice a month
US Payroll Options for Companies
There are several payroll options for companies in the US. You can opt-in for any of the payroll options listed below:
- Remote Payroll: In the United States, a remote payroll occurs when a foreign corporation, i.e., a non-resident company, pays a resident employee. This is true for both domestic and international personnel. One alternative for a non-resident corporation to pay its employees (both domestic and international) in the United States is to use a fully outsourced service like a GEO or PEO, hiring and paying the employees on their behalf.
- Local Payroll Administration: In some circumstances, a firm will register in the United States by choosing a specific form. However, it’ll choose another company to handle its payroll by using a payroll service. As the Employer of Record, the firm will be responsible for ensuring that all employment, immigration, tax, and payroll rules are duly followed. On the other hand, the payroll service provider will handle payroll calculations, payments, and filings.
- Internal Payroll: Larger organizations in the United States may prefer to manage their local payroll for foreign and domestic employees. So, they must finish the incorporation process, register the company, and hire the essential personnel. This creates a need for in-country human resources experts with relevant experience to manage the US payroll process while meeting all tax, withholding, and payroll obligations.
- Fully Outsourced PEO: Companies can outsource their payroll to third-party companies, like Multiplier. It is the best way to conduct payroll operations for your company as the entire thing gets outsourced to a global PEO who manages the payroll at their end.
Entitlement and Termination Terms
Employees might be terminated with or without a relevant cause in the US, as long as it’s not for illegal grounds. The employment contracts for highly skilled employees often include a “just cause termination” clause stating that an employee can only be dismissed for “cause” and specifying possible reasons for termination.
US Payroll Processing Company
Multiplier can help you onboard employees and set up payroll in the US without even establishing a subsidiary there. Our experts are well-versed with the regulations and labor laws of over 150 countries. Hence, we ensure total compliance while managing your payroll and international teams, drafting work contracts, etc.
As your global partner for PEO and EOR, Multiplier can relieve you of payroll and employee management burden.
How Multiplier Can Help With Global Payroll?
Managing Payroll in the US becomes easy with the help of Multiplier. Multiplier is known for providing PEO services to multiple companies across different countries. In addition, we can help you with any payroll processing for your employees, so you can solely focus on your business operations.
We boast of providing the best SaaS-based PEO services that can help you out with everything, from determining an employee’s gross pay to filing your federal taxes.
Frequently Asked Questions
Is paying the tax compulsory for all employees?
Yes, tax is one of the major components of the US payroll process, and hence all employees must pay their relevant payroll tax.
What is FICA Tax?
The FICA tax is a mandatory payroll tax split between employees and businesses. Unlike the federal income tax, the FICA tax is a percentage of the taxable wage of employees.
Are all fringe benefits taxable?
Some fringe benefits like employee discounts, health insurance, dependent care, and retirement plans are not taxable.