Payroll in the USA

What is payroll in the United States?

Payroll in the US encompasses payments, onboarding, termination, severance, benefit management, deductions, compliance, and taxes for full-time employees and contractors. 

Companies have two options for running payroll in the US: 

• 1) open an entity and partner with a PEO service provider for payroll or 

• 2) use a global EOR service like Via.

Payroll in the US can be tricky to figure out if you are unfamiliar with how income taxes, sales tax, and the country's social security system breaks down. Plus, each of the 50 states has its own laws and regulations.

The USA does not have flat rates for how payroll is broken down. Businesses need to be mindful of how each individual state’s tax breaks down, while also paying the standard federal tax that is required across the vast nation.

This article gives businesses expanding to the USA an overview of how to set up payroll compliantly, as well as some of the options for administering payroll.

Payroll taxes in the US

Pay cycle

Unlike many European and Latin American countries, there is no standard USA payroll cycle. US-based employers have a wide range of liberties, so they can choose to pay employees weekly, bi-weekly, semi-monthly, or monthly.

Employers can choose to direct deposit paychecks into their employees accounts or give them hard copy checks. Either way, employers should always give their employees a pay slip that breaks down their deductions from each payroll period.

Social Security

Social security and medicare are a flat rate in the United States. They are a federal withholding and cover the country’s social security and medicare system.

Employers and employees both pay 6.2% of an employee’s salary into social security and 1.45% for medicare. This is a total contribution of 7.65% for both employer and employee.

Corporate tax

In the United States, there is a flat rate of 21% that corporations are obligated to pay when calculating their payroll each year.

VAT

In the US, there is no standard value added or sales tax. The sales tax varies based on state regulations. Most sales taxes range between 4-7%. Some states like Delaware and Oregon don’t have sales tax on goods and services. However, they might still have local sales tax in certain cities and municipalities.

State tax

In addition to federal withholding, states will also have a withholding tax on the state level that is deducted from payroll. The state tax will vary based on where you work and where you live. Some states choose to not have income taxes.

Some cities and areas will go even further and have local or wage taxes that are further deducted from payroll. This money is meant to go towards public services.

Withholding tax

The United States has 7 different tax brackets for income withholding for payroll. These withholdings will depend on the employee’s salary.

Options for setting up payroll in the United States internally vs. externally

To pay US employees from a foreign country like Canada or the UK, there are a few options.

Foreign companies can use remote payroll services that run out of the parent company, team up with a third-party outsourced payroll (like a PEO), or partner with a global EOR service like Via that handles the payroll entire process.

Setting up internal payroll

For companies that have a commitment to establishing and growing a business presence in the US, running payroll internally makes sense. However, this option requires setting up an entity, which can take over six months and requires in-depth knowledge of tax laws. You will also need a large amount of investment capital 1) to set up an internal HR team and 2) register with a number of government institutions. This process can take a lot of time and money, which is why people choose EOR services like Via.

Setup a PEO/have another company run payroll

Another option is to use a PEO service that handles payroll and hiring, or to use an internal payroll services company. PEO services handle payments, benefits, deductions, and other payroll processes.

However, PEO services and internal processing companies do not take full responsibility for legal compliance. If anything were to go wrong, the parent company is still held liable. This is technically a co-employment model, which means the parent company will still need to set up an entity within the country.

Fully outsource payroll and benefits with an EOR like Via

Finally, you can hire employees using a global EOR service like Via. EOR services handle global payroll, benefits, and compliant onboarding. An EOR service already has an established entity in the US, so that you don’t have to worry about establishing one to pay employees.