Employers typically follow a bi-monthly payment schedule, with salaries paid every two weeks.
Salary must be paid in cash, by check, or by direct deposit to the employee’s account at a bank or other financial institution.
Some aspects of payroll processing are regulated by the Internal Revenue Service (IRS) and the Department of Labor (DOL). You must comply with these laws:
- Fair Labor Standards Act (FLSA)
- Federal Insurance Contributions Act (FICA)
- Federal Unemployment Tax Act (FUTA)
In addition, you also have to abide by state payroll processing laws. Each state has its own rules governing minimum wage, payday schedules and recordkeeping. Payroll compliance in the US can become cumbersome if you have employees in more than one state.
If you have 1-2 employees in one state, you can process payroll manually. You will still need to keep records of things like hours worked, wages paid and worker classifications. But as you add more employees and contractors, you’ll need to use an automated solution for payroll processing.
Before you start processing your payroll, you will need the following documents from your employees:
- W-4 Employee’s Withholding Certificate
- W-9 Employee’s Withholding Certificate – used for contractors or freelancers. You will need this to file 1099-NEC at the end of the year
- I-9 Employment Eligibility Verification
- Medical insurance and Retirement plan forms
Classifying employees correctly as employee or contractor is a major issue with US payroll processing. An error can lead to fines from the IRS. If you control the only the output or result, then the worker is likely a contractor. If you also control how the work is to be done, then the worker must be classified as an employee.
You can withhold income tax, Social Security tax and Medicare tax only for employees, not independent contractors or freelancers. For employees, you will need to file form W-2.
Employers are responsible for calculating and withholding money for federal, state and local taxes from every workers’ paychecks. It’s determined by the Forms W-4 submitted by your workers and tax rates. In addition, you need to pay federal unemployment tax (FUTA) . You will also match your employees’ contribution towards the Social Security and Medicare taxes.
If your employees opt to contribute towards 401K or other retirement plans, you will need to withhold their contribution and deposit in their retirement accounts. If you offer health and other insurance, you will have to deduct employee contribution towards those plans and pay to the insurance provider.
Sometimes, you may have to deduct towards court ordered deductions such as such as child support and alimony.
As you can see, setting up and entity, hiring employees and managing payroll in the US is a complex and costly affair. You’re better off going with an Employer of Record service provider like Globalify unless you plan to hire a large number of employees.
Individual Income Tax
In the US, domestic income is subject to income tax for both citizens and foreigners. Any foreign income of a resident is also taxed in the US. In addition to the federal income tax, most states and cities also levy income tax on their residents.
The US income tax system follows the progressive structure meaning people who earn more also pay higher taxes. United States offers married couples the option of filing their tax return jointly.
The following table shows federal income tax rates in the US as of July 2022: