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Payroll & Tax in United States

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United States payroll & taxation

There are specific rules for payroll and taxation in the USA, depending upon the state of incorporation and / or business operation.  The primary concerns for a foreign company that needs to comply with tax laws in the USA are: federal and state individual income tax for employees, Social Security and Medicare costs, payroll tax, sales tax, withholding tax, corporate tax and permanent establishment concerns.  There is also potential state and federal unemployment insurance that is paid by the employer, as well as workers’ compensation funds.

A US company must register for payroll tax in its state of formation. In order to comply with federal tax requirements, the company will need to obtain an Employer Identification Number (EIN).  As with most other things, payroll tax is state-based, so the exact procedure will depend upon the state, and most states have income tax withholding requirements as well.  For many companies using a local specialist payroll provider will simplify this process and ensure full compliance with local laws.

Your Payroll Options in United States

Remote Payroll

A remote payroll in the USA is where a foreign company, i.e. a non-resident company, payrolls a resident employee in the USA.  This applies to both local and foreign employees. One option for a non-resident company to payroll its employees (local and foreign) in the USA is to use a fully outsourced service like a GEO or PEO which will employ and payroll the staff on their behalf.

Local Payroll Administration

In some cases, a company will register their business in USA under one of the forms available, but prefer to have another company administer its payroll.  This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider.

Internal Payroll

Larger companies with a commitment to the USA may wish to run their own local payroll for all employees, foreign and local.  In order to accomplish this, they will have to complete incorporation, register the business and then hire the necessary staff.  There will be a need for in country human resources personnel who have the background needed to manage a USA payroll, and can fulfill all tax, withholding, and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations.  The company will need a local accounting firm and potentially legal counsel to ensure full compliance with USA employment laws.

Fully Outsourced Payroll & Employment

Companies can outsource the employment and payroll of their staff in USA to a GEO, like Shield GEO. This is possible for both foreign workers and US nationals. This is the easiest, fastest and safest way to payroll staff in USA.

Shield GEO manages all aspects of payroll for workers in USA, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client.

Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips.

Read more about outsourced payroll and employment through Shield GEO.

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Setting up payroll in United States

Information Explanation
Currency ?

The United States dollar (USD)

Corporate Income Tax Rate

There is a flat tax of 35% that applies to the taxable income of corporations that have annual taxable income  equal to or greater than USD 18,333,333. Progressive tax rates, starting at 15%, apply to income of corporations with total taxable income of less than USD 18,333,333.

Payroll Tax

Employers must withhold federal income tax from employee wages and must forward the tax to the government. They also must pay federal and state unemployment tax and social security taxes.

The federal unemployment insurance rate = 6% (imposed on the first USD 7,000 of each employee’s wages). State unemployment insurance is mandatory in all 50 states and the District of Columbia and varies by state. Employers receive a credit, up to a maximum of 5.4%, against the federal tax for amounts paid to state unemployment insurance funds.

Sales Tax

Sales tax is collected in 45 states with rates differing based on specific state. The lowest average combined rates are in Maine (5.50%),Wyoming (5.47%), Wisconsin (5.43%), Hawaii (4.35%) Alaska (1.76%). The highest average combined state sales tax rates are in Tennessee (9.45%), Arkansas (9.26%), Alabama (8.91%), Louisiana (8.91%), and Washington (8.89%). The differences in the tax rates result in consumers shopping across borders or buying products online.

Withholding Tax

Gross amount of dividends, interest and royalties are subject to a 30% withholding tax. Any other income, profit or a gain characterised as “fixed or determinable, annual or periodic” (FDAP) is also subject to this tax (the rate can be reduced under a tax treaty or if the income is ECI it is not taxable). A non-final tax is also withheld on proceeds from the disposal of US real property interests (10%) and by partnerships on their ECI that is being allocated to foreign corporate partners (35%).

Other Tax

There is a variety of excise taxes. Apart from this, local governments, the 50 states and the District of Columbia impose various income, franchise, license, stamp, estate, property and other taxes.

The U.S. also have unified estate and gift tax for citizens and residents, which is generally based on the net assets of the donor/deceased in excess of USD 5,430,000 (2015), and there is generally no tax imposed on donees/heirs on the appreciation of the assets in the hands of the decedent. Non-resident non-citizens, are taxed only on property situated in the United States and in excess of USD 60,000 (subject to increase by various treaties). A gift tax is imposed on gifts made during a person’s life, which is unified with the estate tax. The maximum rate for estate and gift taxes is 40%.

Individuals, estates and certain trusts must pay a 3.8% tax on net investment income over a certain threshold (USD 250,000 for married individuals filing jointly, USD 125,000 for married filing separately and USD 200,000 in other cases;USD 12,300 for estates and certain trusts). Individuals also must pay a .9% tax on wages, compensation or self-employment income that exceeds a threshold amount (USD 250,000 for married individuals that file jointly,USD 125,000 for individuals married and filing separately,  USD 200,000 for single individuals).

Tax Figures

Information Explanation
Corporate Income Tax ?

There is a flat tax of 35% that applies to the taxable income of corporations that have annual taxable income  equal to or greater than USD 18,333,333. Progressive tax rates, starting at 15%, apply to income of corporations with total taxable income of less than USD 18,333,333.

Income Tax Rate ?
Grossed income Tax Rate (%)
$0 - $9225 10% of taxable income
$9226 - $37,450 15%
$37,451 - $90,750 25%
$90,751 – $189,300 28%
$189,301 – $411,500 33%
$411,501 – $413,200 35%
$413,201+ 39.6%

Different thresholds apply to other categories of taxpayers ( married individuals filing joint returns and surviving spouses, married individuals filing separate returns and heads of households)

Payroll Tax ?

Employers must withhold federal income tax from employee wages and must forward the tax to the government. They also must pay federal and state unemployment tax and social security taxes.

 

The federal unemployment insurance rate = 6% (imposed on the first USD 7,000 of each employee’s wages). State unemployment insurance is mandatory in all 50 states and the District of Columbia and varies by state. Employers receive a credit, up to a maximum of 5.4%, against the federal tax for amounts paid to state unemployment insurance funds.

Sales Tax ?

Sales tax is collected in 45 states with rates differing based on specific state. The lowest average combined rates are in Maine (5.50%),Wyoming (5.47%), Wisconsin (5.43%), Hawaii (4.35%) Alaska (1.76%). The highest average combined state sales tax rates are in Tennessee (9.45%), Arkansas (9.26%), Alabama (8.91%), Louisiana (8.91%), and Washington (8.89%). The differences in the tax rates result in consumers shopping across borders or buying products online.

Withholding Tax ?

Gross amount of dividends, interest and royalties are subject to a 30% withholding tax. Any other income, profit or a gain characterised as “fixed or determinable, annual or periodic” (FDAP) is also subject to this tax (the rate can be reduced under a tax treaty or if the income is ECI it is not taxable). A non-final tax is also withheld on proceeds from the disposal of US real property interests (10%) and by partnerships on their ECI that is being allocated to foreign corporate partners (35%).

Employee Social Security (EE SS)

See the section above.

Employer Social Security (ER SS)

Social security taxes include old age, survivors and disability insurance (OASDI), and “hospital insurance”, which is also known as “Medicare”. The employer’s part of these taxes is deductible for income tax purposes. Self-employed workers are subject to a separate tax that is similar to the one paid by employers.

Medicare tax = 2.9% (plus the additional 0.9% Obamacare tax for wages above a specific threshold);

The OASDI tax = 12.4% (imposed on the first USD 118,500 of wages).

United States

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