How to deal with US Payroll complexities?

As the world's largest and most significant international business hub, the USA represents a uniquely challenging payroll territory.

The USA is a vast and diverse business landscape, with 50 states participating in the federal legislative infrastructure. Each state represents their administrative regions, with state-level rules and regulations complicating the payroll compliance for millions of businesses within the nation's borders.

Since each state has its legislative powers and is characterized by distinct political, cultural, and economic concerns, it's easy to see how the landscape of the United States has diversified significantly over time - along with the laws governing payroll.

Understanding the foundations of the US Payroll
From language and currency to tax rates and Medicare, a foundational understanding of US payroll basics is vital to building your business' pay system.
  1. The Basics: You must register for payroll in the state of their formation, and obtain an Employer Identification Number (EIN).

  2. Pay Frequency: There is no federal law fixed for the frequency of pay. But, businesses have to choose an appropriate schedule based on the number of employees, the type of workers you have(hourly vs. salaried workers), and state laws.

  3. Income Tax: At a federal level, you are required to withhold income tax, at source, from their employees - and report taxes to the IRS. Most states and some localities also levy income taxes and impose withholding obligations on employers.

  4. FICA: Under the Federal Insurance Contributions Act (FICA), employees and employers must contribute to the United States' social security and Medicare schemes. Deduction of these contributions is at the source by employers just like income tax. In 2019, social security rates were set at 6.2% up to $132,900, and Medicare rates at 1.45% on all wages for both employers and employees.

  5. Federal Unemployment Tax Act (FUTA): You are required to pay unemployment taxes to states and the federal government to finance unemployment insurance program funds. For 2019, the employer pays 6.2% on wages up to $7000.

  6. Authorities: The primary tax authority in the United States is the Internal Revenue Service (IRS), which is responsible for collecting and administering income and social taxes at the federal level. Tax compliance is a significant focus of the IRS, so you should make an understanding of reporting and remittance under the IRS tax code a priority.
Challenges of the US payroll
Payroll challenges are common to business landscapes in every part of the world - and the situation is no different in the United States.
  • Statutory compliance: An ideal payroll process is formulated, keeping in mind the industry standards and employee requirements. When a business is run in multiple locations, then ensuring a standard payroll process in compliance with local and federal bodies is challenging.

  • Accuracy: In large organizations with multiple types of workforce, the payroll process is quite a feat. Payroll depends on numerous factors such as frequency of pay, type of workers, promotions, hikes, incentives, expenses, and many other factors. Maintaining accuracy is another challenge faced by large organizations with multiple scenarios.

  • Reporting: The United States is one of the world's most extensive payroll territories, by population and geographic size, spanning nine time-zones and numerous overseas territories. Businesses in the US must consider these logistical and environmental challenges to build a suitable payroll system. Expansion had led to payroll problems - in particular, limited visibility of reporting and costs over the locations involved.

US Payroll Solutions
Given the US' unique legislative infrastructure, and the government's focus on strictly enforcing tax laws, finding a way to navigate the regulatory complexity and achieve compliance must be a priority for businesses operating within the country.

Creating a US payroll solution means carefully engaging with various layers of regulation, and a range of external factors. While the quite size and diversity of the US may make the process frightening for businesses, there are plenty of options available - from using an in-house system administered by employees, to engaging a service provider to implement a global payroll solution.

Whichever strategy you choose, support your decision with a strong understanding of the legislative environment, and your unique business needs within the United States and beyond.

To help you get started on your payroll solution, talk to an expert from ONE BCG.

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