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This guide has important information for businesses looking to hire employees or contractors in the US.
Globalify offers Employer of Record solution in the US. Hire remote employees without the headache of managing the local compliance issues.
Use our end-to-end solution from sourcing candidates to onboarding, payroll, benefits and termination of employment.
US Country Guide for Hiring Employees and Contractors
Currency
$ (US Dollar)
Capital
Washington, DC
Language
English
Continent
North America
Population
332 Million
GDP
$23 Trillion (2021)
Per Capita Income
$69,288
GDP Growth Rate
5.7% (2021)
Date Format
mm/dd/yy
Fiscal Year
January 1 to December 31
Payroll Cycle
Bi-Monthly
Major Religions
Christianity, Judaism
Country Highlights Section
The United States is the third largest country by area as well as population. It’s also the world’s biggest economy and military power.
The US leads the world in technology and innovation. It’s also home to the largest financial market in the world. The US economy grew at an average pace of
Hiring good talent in the US is not easy. The unemployment rate is at an all-time low. There were almost 10 million open positions in the country in Q1 2022. It takes over 3 months to hire a software developer in the US.
High wages and low unemployment rate have combined to drive offshore outsourcing in the US. Most large US technology companies hire programmers in countries like India to meet their needs. US is also the biggest outsourcer for business processes, data entry, digital marketing and other services.
US is also the most attractive market for many products and services. So many overseas companies want to hire sales and marketing talent in the US. Many outsourcing companies hire American workers to fulfill onsite requirements of their clients.
Hiring in the US
A business needs a local entity, usually a subsidiary, in the US to hire locally.
It can take several weeks to considerable amount of money to set up a subsidiary in the US. You’ll need to register your business name and incorporate your preferred type of entity with a US state. You will need to apply for a Federal Tax ID Number or Employer Identification Number (EIN).
It’s a nine-digit number the Internal Revenue Service (IRS) uses to keep track of your organization’s tax obligations. In some ways, it’s similar to Social Security number for individuals. You need to file Form SS-4, Application for Employer Identification Number (EIN) to the IRS to get your EIN.
You will also need to get sales tax permit in states where you will do business in the US.
Opening a company bank account in the US can be quite challenging. Most banks require a resident American to be the signing authority for opening a bank account.
Hiring and paying employees or contractors in the US is a complex process. You need to comply with social security, Medicare and other employer obligations. United States has one of the strongest enforcement systems for corporate governance. You will need a good lawyer and CPA to help you with compliance.
There are legal differences between employees and contractors in the US. Incorrect classification of a contractor as an employee or vice-versa can land you into legal troubles.
With Globalify’s Employer of Record services, you can start hiring employees and contractors immediately, without the need to set up a subsidiary in the US. We will take care of all legal compliance, tax issues and employee administration so you can focus on growing your business in the United States.
Minimum Wage in the US
The national minimum wage in the US is $7.25 per hour. Each state has its own minimum wage law that can be higher than the national minimum wage. You must pay the higher of the two rates to your employees. California has the highest minimum wage at $15 per hour.
While minimum wage law sets the floor, in most cases, you will be paying much higher salary to your employees. Due to low unemployment rate and too many opportunities, actual wages top $20 per hour in most while collar jobs. In the technology industry, a competitive salary is in the range of $50 per hour in most cities.
Working Hours in US
Standard working hours in the US are 8 hours per day or 40 hours per week. The standard work week is Monday through Friday but can be changed depending on business need.
The Fair Labor Standards Act (FLSA) defines which roles are eligible for overtime pay in the US. In general, most managerial and executive roles are exempt from overtime payment. Most creative and professional positions are also exempt.
Overtime pay for non-exempt roles is 150% of the base hourly pay. All contractors or part-time employees are generally entitled to overtime pay.
Payroll and Taxes in the US
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:

Annual Income


Employer Costs in the US
According to the U.S. Bureau of Labor Statistics, employee benefits amounted to 31.2 percent of total employee cost in March 2022. Practically, one in every 3 dollars spent on labor cost went towards paying for employee benefits and payroll taxes.

Employers bear the following costs in the US:
FICA contributions (Social Security and Medicare) amount to 7.65% of employee’s compensation. It provides retirement, survivorship, disability, and supplemental health benefits to employees.
FUTA tax rate is 6%, but most employers get a credit of 5.4%. So, the net outgo is 0.6% of an employees’ wages.
SUTA (State Unemployment Tax) varies from state to state. You can find out the applicable rates from the state tax office in the states you employ people. In most states, you will pay about 2.7% of an employee’s wages towards SUTA.
All employers have to take Workers’ Compensation Insurance. This is used to pay regular wages to workers who get injured on the job. The rates for workers’ compensation insurance depend on the job classification and salary of the employee. In general, you will pay a much lower insurance premium for white collar jobs as the likelihood of an injury is low in these jobs. For example, if you hire a software developer in the US for $100,000 per year, you will pay between $300-400 per year for workers’ compensation insurance for this employee.
You must offer health insurance in order to attract high quality talent in the United States. This includes health, dental and vision care plans. Most companies offer contributory plans where both the employer and the employee pay a percentage of the premium. With the soaring health insurance costs, it has become impossible foe most employers to bear full cost of the insurance.
According to the Kaiser Family Foundation’s annual employer health benefits survey, the average employer contribution was over $16,000 per employee per year in 2021. The average cost to employees was nearly $8,000 per year. When you add on the cost of dental, vision and other insurance benefits, your annual expenses can cross $20,000 per employee per year.
The retirement plan (401K) is not mandatory in the US. But most employers offer a matching 401K plan to attract and retain employees. Employer typically provide a matching contribution between 3-6% of the salary. A minor detail to note is that bonus in the US is subject to retirement contribution. So, if you contribute 3% to your employee’s 401K plan, a 10% bonus will, in reality, become 13% after accounting for the 401K.
Statutory Leaves in the US
The federal Family and Medical Leave Act (FMLA) mandates up to 12 weeks of unpaid leave. The FMLA provides up to 12 weeks of unpaid sick, parental and maternity leave for an employee
Employees must have worked for at least one year at the same employer to get this benefit.
There is no national standard for paid or sick leave in the United States.
Nine states and Washington, DC have laws requiring paid family and sick leave.
However, most employers in the services sector offer 2-3 weeks of paid leave. Most employers also offer disability insurance that pays workers during maternity or illness. It’s usually a contributory benefit where both the employer and the employee pay towards the premium.
Employee Benefits
The United States has a comprehensive social security system that offers retirement, disability and medical benefits. Employees are also eligible for unemployment benefits for limited amount of time of time.
Most employers also provide paid leave, health, dental and vision insurance to their employees. Some also offer group life and disability insurance to their employees.
Even though the US has a social security system, most people also contribute towards other retirement plans like 401K and IRA. Contributions to these plans are exempt up to an annual limit. Roth IRA is another retirement plan where contributions are not tax exempt but future earnings and withdrawals are tax exempt.
Employee Termination
Most employment agreements in the US are “at will” meaning employment can be terminated without any reason by both the employee and the employer. But the standard practice is to give 2 week’s notice or pay to the employee.
But employers cannot terminate an employee based on his or her race, gender, national origin, disability, religion, or age.
Employers also have to follow local city, state and federal laws while dismissing an employee. The employer may have to allow the employee to continue with health insurance while unemployed under the COBRA law.
Corporate Taxes in the US
Business profits are taxed by both the federal and the state governments. Some cities also levy income tax on businesses.
The current federal corporate tax rate is 21%. State tax rates vary by state.
States of Nevada, Ohio, Texas, and Washington have a gross receipts tax instead of corporate income tax. The gross receipts tax is applicable on all reported business income, not just the profit.
South Dakota and Wyoming do not have any state corporate tax.
Some states have both income tax and gross receipts tax.
Most states have a flat corporate tax rate, but some have tax brackets.
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