This is how payroll works in the US

In this post, we’ll provide some context on what’s happening with wages in Latin America and explain how payroll works in the United States. If you’re considering hiring employees in the U.S., this information could be of interest to you.

Let’s talk about minimum wages in Latin America and the United States, and address some key questions: What are the requirements for entrepreneurs from around the world who want to do business in the United States and need to manage payroll? Why is it important to hire payroll services in the United States, and how does this benefit the operational efficiency of their businesses?

How Is Payroll Calculated in the United States?

The first thing you need to know is that the United States is a federal country, meaning that autonomy is a determining factor when it comes to wage policies. Government administrations set the rules, and an example of this is the fiscal policy that organizations must follow, both federally and at the state level.

To provide some context, while the minimum hourly wage in Arizona is $12.80, in California it’s $15.

A factor that will significantly influence the preparation and presentation of payroll contributions and withholdings in the United States is, for example, whether your employees are single or married, but we’ll discuss that later.

The first thing you need to do is register the company with the State’s Department of Treasury for the submission and payment of labor contributions (withholdings).

Once the company is registered, you must follow the same process for each employee. Finally, you must comply with quarterly and annual payroll management obligations at both the federal and state levels.

Learn more about our payroll services in the U.S.

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What Are Payroll Deductions in the United States?

Federal Income Tax Withholding

According to the Internal Revenue Service (IRS), the amount of income tax that your employer withholds from an employee’s salary depends on how much the employee earns and, for example, the employee’s marital status. If the employee is single, they fill out a different form than a married person; the difference lies in that a married person files a joint return, while a single person files separately.

Another key factor in analyzing an employee’s payroll in the United States will be their salary. For example, if a data analyst earns $8,000 per month and is single, the amount the employer withholds will be $1,160 per month.

This is the only withholding in the United States that does not have a fixed charge; we’ll see that the others do have defined amounts.

Learn more about tax withholding on the IRS website

Federal and State Minimum Wage in the United States

Social Security in the U.S.

The amount to contribute is 12.4% of the gross salary (6.2% by the employer, 6.2% by the employee). The Social Security wage base limit is $142,800 for 2021. According to the IRS, Social Security benefits include retirement, survivor, and disability benefits. They do not include Supplemental Security payments, which are not taxable.

Medicare in the U.S.

The amount to contribute is 2.9% of the gross salary, split 50/50 (1.45% for the employer and 1.45% for the employee). This withholding is known as hospital insurance.

The IRS treats Social Security and Medicare as a single entity, so they are reported on the same form (Form 941) and are reported quarterly.

Federal Unemployment Tax (FUTA)

Also known as FUTA, this is a tax paid only by employers and is reported on Form 940, the Employer’s Annual Federal Unemployment Tax Return. This tax amounts to 0.6% on wages up to $7,000. According to the IRS, wages paid to non-resident aliens by any employer for services performed in the United States are generally subject to FUTA taxes.

State Unemployment Tax (SUTA)

Also known as SUTA, this is a type of payroll tax that states require employers to pay. In Florida, for example, it amounts to 2.7% with a cap of $189 on wages up to $7,000.

Learn more about federal and state unemployment taxes

What Is Prodezk? We are specialists not only in the preparation and submission of payroll contributions and withholdings but also in services such as accounting, annual renewals, commercial certificates, payroll management in the United States, company formation, and a service we call flexible space, where we provide our clients with a physical address to create and maintain their company active in the USA.

Learn more about Prodezk’s payroll services