The US market has a lot to offer. And any company wanting to operate there, or just explore the market, is going to want to take on US staff. This guide will help companies understand US employment law and requirements, how payroll operates, and how they can best hire employees in the USA.
Employment law in the US is well defined, but in some areas is looser than in other Western countries. It has evolved since the 1930s through a series of separate acts covering different areas. There are over 180 different laws enforced by the US Department of Labor. The main ones governing employment and payroll include:
- The Civil Rights Act of 1964
- The Equal Pay Act of 1963
- The Family and Medical Leave Act of 1933
- Fair Labor Standards Act 1938
- Age Discrimination in Employment Act of 1967
- Occupational Safety and Health Act of 1970
For any company that wants to hire employees in the USA, a local company is needed. This company will be issued with a Federal Tax ID Number. With such a Federal Tax ID Number, the company can hire and manage employees. A suitable contract needs to be signed between the employee and the company, and there are extensive ongoing requirements for payment and payroll that must be maintained.
The alternative to setting up a new company is to use a Professional Employment Organization (PEO) on your behalf. Such a company is legally registered in the US and able to hire and manage employees. It can also handle payroll, benefits, and tax remittances.
For any overseas company looking to expand and hire workers in the US, there are three main options:
- Establish a legal entity in the US. This allows a company to hire its own workers and is fully responsible for legal and administration compliance.
- Use the services of a PEO. A PEO can handle all aspects of employment, employee and payroll management, and legal compliance. It will act as the Employer of Record for employees. The company can manage the day-to-day work but without the burden of employment.
- A combination of both of these options. It is also possible to establish a US company and still use a PEO to handle the complex administration of employees and payroll.
Whichever option is chosen, there are many essential aspects of employment in the USA to understand. This guide looks through some of the main areas of employment and payroll law and requirements.
Employment law in the US can be very complicated. It is set out in a series of laws administered by the Department of Labor. These have evolved over the past years to include new areas, leaving a complex series of different legal acts.
Also, some regulations are set at the federal (countrywide) level, and some are defined at a local state level. Different states, for example, set different levels of minimum wage. They also have different treatment and levels of income tax.
Importantly, there is no legal requirement in most states for a formal employment contract. Most employment in the US is carried out on an ‘At-Will’ basis, meaning that it can be terminated at any time. More formal contracts, with notice periods, are generally only used for some senior positions. This is quite different from the formal contracts used in many other countries, such as the UK and European countries.
The majority of employment in the US takes place on an ‘At-Will’ basis. This means employees can be terminated at any time, for any reason, by either employee or employer. There are some exceptions, such as if the termination is due to discrimination related to pregnancy, race, religion, age, or other factors.
As such, there is no need to define a formal probationary period, although many companies do set this as 90 days. Employers, therefore, have a great deal of flexibility to take on and dismiss staff as business needs dictate.
Such employment practices are defined in the Fair Labor Standards Act (FLSA). There is no requirement here for any severance pay when employees are dismissed. Some employers will offer this, based on length of service, but many will not.
The US is unusual amongst western countries, as there is no legal requirement for paid holidays for employees. This contrasts strongly with areas such as the UK and Europe, where 20 or more paid holiday days are standard.
Many employers choose to give employers around 10 days of paid vacation per year, but this is up to each company to decide. Sometimes this is not offered during a probationary period, and entitlement only begins after a specified period of service.
According to a report from the US Bureau of Labor Statistics, 77% of employers offer paid vacation, and this averages 10 days per year. After 20 years of service, this rises to an average of 20 days.
The same legal requirements apply to public holidays, of which there are eight each year. There are no requirements in law for a company to give time off, or to pay employees if they do offer it. But many choose to do so, either on the day or an alternative date.
Sick leave is managed differently. There is no federal (countrywide) law that mandates sick pay or leaves. But several states specify sick leave requirements. Again, it is common for many employers to offer paid leave for sickness, in line with or in addition to any state requirements.
Unlike in many countries, there is no requirement in the US to provide paid maternity leave. The Family and Medical Leave Act state that employers must provide up to 12 weeks of leave and protect their job. However, the application of this differs in some states, and in some, it only applies to companies with over 50 staff. If employers choose to pay for this time off, it is treated as a benefit.
The current federal minimum wage is $7.25 per hour. States with their own hourly wage requirements may exceed this rate, but employers specifically covered by the Fair Labor Standards Act (FLSA) must adhere to the federal minimum wage. This is as high as $15 in Washington DC. There are also planned increases from at least 20 states in 2021. Full terms and rules for applying minimum wage can be found on the Department of Labor website.
Note also that in the US, there is no legislation regarding maximum working hours. Standard hours and overtime can be agreed upon with the employer but are not mandated. This contrasts, for example, with the UK, where there is strict legislation for a maximum 48 hour averaged week.
The following table shows the minimum wage for each state in 2023 and the proposed level in 2022:
|State||2023 Minimum Hourly Wage||2022 Minimum Hourly Wage|
|California||$15.50 for all employers.||$14.00 for employers with 25 or less workers; $15.00 for larger businesses.|
|Maryland||$13.25 for employers with 15 or more workers: $12.80 for smaller businesses.||$1250 for employers with 15 or more workers: $1220 for smaller businesses.|
|Minnesota||$8.63 for small employers and $10.59 for large employers.*||$8.42 for small employers and $10.33 for large employers.|
|Nevada||$10.25 for employers offering qualifying health benefits; $11.25 for all others.||$9.50 for employers offering qualifying health benefits; $10.50 for all others.|
|New Jersey.||$14.13 for most emplovers: $12.93 for seasonal and smalemployers who have less than six workers.||$13.00 for most employers: $11.90 for seasonal and small employers who have less than six workers.|
|New York||$15.00 for New York City, Long island and Westchester: $14.20 for the rest of the state.||$15.00 for New York City, Long Island and Westchester: $13.20 for the rest of the state.|
|Oregon||$15.45 for employers in the Portland metro: $13.20 for non-urban counties: and $14.20 for all others.||$14.75 for employers in the Portland metro; $12.50 for non-urban counties: and $13.50 for all others.|
Companies must make social security and tax contributions for employees on the payroll. This should be deducted from payments to employees, along with any other benefits offered. Tax payment is handled through the US Internal Revenue Service (IRS). Once a business is set up, it will receive a Federal Tax ID Number. Each employee also needs to be registered with the IRS and will receive a Federal Employer ID number.
As well as submitting withheld taxes and other deductions and employer contributions, employers must meet strict reporting requirements. Regular and mandated submissions include:
- Employers Federal tax Return (Quarterly)
- Employers Federal Unemployment Tax Return (Annual)
- Annual Return of Withheld Federal Income Tax
Note that taxes can be collected at federal, state, and local levels, making the US’s overall taxation system somewhat complicated.
Below you can find a list of the mandatory deductions in the USA.
Social security tax is charged on all income up to a defined limit. Together with Medicare taxes, these are also known as FICA Taxes (Federal Insurance Contributions Act).
The rate (for 2020 and 2021) is 12.4% of income, with a maximum limit of $137,700 for 2020 (rising to $142,800 in 2021). This is split between employee and employer, with 6.2% taken out of employee pay and 6.2% contributed by the employer.
This is a federal tax, separate from the social security tax. Like social security tax, it is paid half by the employer from income and half separately by the employer. Rates are as follows:
- 9% (so 1.45% paid by the employee and 1.45% by employer) on all income
- An additional 0.9% on income over $200,000, paid by employees (this is for unmarried employees, it changes to joint $250,000 for married couples).
The employer needs to pay two additional social security taxes. Unlike social security and Medicare taxes, these are not shared with the employee.
- Federal Unemployment Tax (FUTA): This is set at 6% of salary (but there is a credit of 5.4% for any SUTA taxes paid). It is only paid on the first $7,000 of salary.
- State Unemployment Tax (SUTA): Each state sets the rate for each employer based on their history of previous employees who have claimed for unemployment. Rates should be checked with state labor bureaus but are typically 2-4%, although in some states can be very low for companies with limited claim history.
Healthcare in the US is privately managed, and company contributions towards health insurance are common. There is no legal requirement, though, to offer this if you employ less than 50 staff (or equivalent on a full-time basis). If you employ more than this, then you must pay a portion of this cost through payroll.
Federal income tax should always be deducted through payroll. Like in most countries, US income tax is a progressive tax based on income, with higher rates paid just on higher income bands. It is fully deducted from employee salary.
These rates change each year and are shown below for 2023. Rates differ for single and married tax filers (there used to be more of a ‘penalty’ for married filers, but in 2020 this only applies at the top level. A ‘head of household’ is defined as a taxpayer who is unmarried but pays more than half the cost of dependent household members. Full terms are complex and should be checked with the IRS.
|Tax Rate (on band)||Single Person||Married couple, filing jointly||Married couple, filing separately||Head of Household|
|10%||$0 to $9,875||$0 to $19,750||$0 to $9,875||$0 to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$9,876 to $40,125||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$40,126 to $85,525||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,526 to $163,300||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350||$163,301 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025||$207,351 to $518,400|
|37%||$518,401 or more||$622,051 or more||$311,026 or more||$518,401 or more|
All taxpayers also are entitled to a standard deduction. This is income which is not subject to taxation and is set as follows:
- Single Person: $12,400
- Married couple, filing jointly: $24,800
- Married couple, filing separately: $12,400
- Head of Household: $18,650
Note that in addition to federal income tax, there can be additional taxes that need to be paid at the state or local level. These are also required to be withheld by the employer, but cross-state this may be handled separately. A full discussion of these is beyond the scope of this guide (see the rates and links on Wikipedia for a good guide to each state).
The state income tax ranges from zero to just over 13%. As of 2020, there were 7 states that charged no personal income tax. The highest rates are in California, Hawaii, and Oregon. Each state has rules for the rates, bands that apply, and personal deductions.
Taxes at the local level are known as Property Taxes. These again apply based on personal income but are set at the county level within each state.
There is no doubt that employment law and regulation and payroll administration in the US is very complicated. While the lighter laws regarding the nature of contracts make hiring easier and less risky for the employer than in many other countries, there are still plenty of strict requirements for employee administration, payments, and filings to be completed. Different rules between states make the process even more complicated.
Companies, though do not need to handle this alone. Instead of setting up a new legal entity in the US to hire workers, companies can use a PEO (Professional Employer Organization) solution to hire employees in the USA. Using this model, the company contracts with a qualified specialist company to act as the Employer of Record (EOR) for their US employees. This company will then handle the recruitment, payroll and benefits management, compliance, and required reporting.
Such a solution is available to any company in any country, whether or not they have a legal entity in the US. If they are established in the US, there can still be advantages in outsourcing parts of the management or payroll to a specialized PEO, allowing the company to focus its attention elsewhere.
Some of the advantages of using a PEO in the USA include:
- No need to set up a legal entity/company in the US. This is especially beneficial for new companies, getting them into the market quicker.
- The company maintains day-to-day control of the employee.
- PEO will handle all paperwork, compliance, payroll administration, and government and IRS filings.
- PEO provider has detailed knowledge of employment and payroll law and procedures and remains up to date with changes. This leaves the company freer to focus on its core business.
- PEO can determine the most appropriate contract and form of employment, including looking at law and cost differences between states.
- The PEO can help arrange healthcare provision for employees where needed.
- Many PEO providers can also provide employment and payroll services in other countries, helping companies explore or expand in other markets.