If you’ve ever worked on expanding a business, it won’t come as a surprise that there are many different things you must consider. Can you sell this product in your chosen entry location? Will you have to open a branch office, or is it time to create a subsidiary? Will you need to hire employees, and if so, how?
If you answered “yes” to the last question, then you’ll also have to conduct payroll. As you already know, how to do payroll varies from country to country. Depending on where you are, it may even change from province to province or state to state.
In the United States, you might even have to pay attention to a third level of government when it comes to running payroll. Local and city governments sometimes have laws on the books that can make big changes for employers.
So, how do you do US payroll? If you find yourself asking this question, this guide is for you. It covers the basics of US payroll, as well as some of the finer details. With it in hand, you’ll be well-positioned to start paying your new American employees the right way.
US Payroll 101: The Basics
On the surface, how to do US payroll looks fairly similar to payroll in other countries. You’ll need to set up an account with the IRS. You’ll then collect information from your employees, including:
- Name and Social Security Number
- Current address
You’ll also need them to fill out Form W-4. This form authorizes you to collect and withhold income tax on the employee’s behalf. There are different methods for tax withholding, so the employee can tell you which method they want you to use. You’ll require this form before any new hire starts earning wages.
Once you have the paperwork filed, your new employee can start work. You’ll have to calculate their wage information for each pay period on the calendar. For an employee paid a salary, this would include the salary they earn per pay period. For an employee who is paid hourly, it would be the hours they worked multiplied by their hourly wage.
Calculating Income Tax Withholdings
Here’s where US payroll begins to get a little more complex. Once you’ve calculated an employee’s earnings, you’ll also have to tabulate their withholdings and other deductions.
To do this, you’ll need to know approximately how much they earn per year. This determines their tax bracket. The IRS provides tables, which allows you to determine the appropriate rate of withholding for each employee. You’ll then calculate how much federal income tax to withhold on the employee’s behalf.
Remember the W-4 and the different tax withholding methods? This essentially tells you whether to be conservative with withholdings or not. With the conservative method, you can use a higher tax rate and withhold more from an employee throughout the year. This increases their chances of receiving a refund or, at least, not needing to pay the IRS anything come April 15.
Some employees opt not to use this method. They prefer to keep more of their cash in their pocket, although they may end up on the hook for additional tax in April.
Income tax isn’t the only deduction you’ll need to make from your employees’ paychecks. You’ll also have to make deductions for Social Security and Medicare.
These deductions represent a co-pay between employer and employee. Current rates for Social Security and Medicare are 12.4 and 2.9 percent, respectively. This is split between employer and employee. You’ll deduct the employee amounts from payroll. The other half will have to come from the business’s account.
You might need to deduct other amounts from an employee’s paycheck as well. If you offer health insurance or other benefits that have a co-pay portion, these amounts will be taken from the employee’s earnings. The same is true of contributions to a pension plan.
You may also need to make deductions for workers’ compensation insurance and unemployment programs.
State and Local Rules
In addition to the federal deductions, you’ll also have to look to the laws in the state you’re operating in. If you have offices and employees in multiple states, you could be contending with several different sets of rules. As mentioned earlier, some cities and local governments might also have laws on the books that require you to withhold from an employee’s paycheck.
State income tax is the most common deduction. There may also be state social programs. Some states ask employers to cover the entire cost of unemployment insurance, while others set it up as a co-pay between employer and employee.
Minimum Wages, Record-Keeping, and More
You’ll also need to look to the laws at multiple levels to ensure you’re complying with rules about minimum wages and more. The federal Fair Labor Standards Act lays out rules for minimum wages, although state law can set the minimum above the federal minimum wage.
The same is true of record-keeping requirements. FLSA requires employers to keep good payroll records, but some states may require you to hand out paystubs.
There are also rules about overtime. FLSA was just revised to make more employees eligible for overtime wages. State law can also herald big changes. California is a great example. In early 2020, the state introduced a new law that reclassified many freelancers and contractors as employees. In turn, employers would be responsible for offering benefits, health insurance, and complying with other rules.
Rules about Remittances
Perhaps the most challenging part of payroll in the US is keeping on top of remittances. The IRS schedule for sending in payroll withholdings can be quite demanding. If your quarterly remittances exceed a certain amount, you may find yourself on the semi-weekly remittance schedule.
That means you’re sending remittances to the IRS twice weekly, on top of the paperwork you need to do to file those remittances.
Stay One Step Ahead with the Right Help
If all this information sounds a bit daunting, don’t worry. If you’re wondering if there’s an easy way for how to do US payroll, there’s good news.
Working with the right partner can help you manage the ins and outs of your US payroll. With their expertise, you can be sure your employees will be paid on time and correctly every pay period. You can also be sure you’ll stay on top of remittances and other paperwork.
Finally, a partner will also help you monitor and manage your compliance. As the laws around payroll and employment continue to change, having a knowledgeable US payroll provider could make a world of difference.