Running Payroll in the United States

Managing payroll in the United States presents a complex regulatory landscape for both domestic and international employers. Compliance requires a thorough understanding of federal, state, and local requirements, each with its own set of tax laws, reporting obligations, and deadlines.

Employers must correctly withhold and remit income taxes, Social Security and Medicare (FICA) contributions, and federal and state unemployment taxes (FUTA and SUTA). In addition, varying state-specific rules, local jurisdiction requirements, and frequent legislative updates increase the administrative burden—particularly for foreign companies unfamiliar with the U.S. system.

Before processing payroll in the U.S., companies must complete several mandatory registrations at both the federal and state levels. These steps ensure compliance with income tax withholding, Social Security and Medicare contributions, and unemployment insurance requirements.

At the federal level, employers must register with the Internal Revenue Service (IRS) by applying for an Employer Identification Number (EIN). This unique nine-digit number is obtained by submitting Form SS-4, either online or by mail. The application must name a “responsible party” who holds a valid U.S. Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). Once issued, the EIN is used for all federal payroll reporting and tax payments.

At the state level, companies must register in every state where employees are paid. This typically includes registration with the State Department of Revenue for income tax withholding and the State Department of Labor or Employment for unemployment insurance (UI) contributions. Since each state has its own rules, employers must review and comply with the specific registration and reporting requirements of each relevant jurisdiction.

Additionally, employers are required to report new hires to the appropriate state New Hire Reporting Center—usually within 20 days of the hire date. This helps enforce child support laws and maintain accurate employment records.

While not legally mandated, it is highly recommended and often functionally necessary that companies establish a U.S. business bank account to pay employees and remit taxes efficiently. Federal tax payments must be made electronically using the Electronic Federal Tax Payment System (EFTPS).

Income tax in the U.S. is levied at three levels: federal, state, and local. The system is progressive, with federal rates reaching up to 37%. There are four taxpayer categories that determine the applicable income thresholds. Social security contributions are shared between employees and employers.

Tax Considerations

Federal income tax in the United States is levied on a progressive scale, with rates for the 2025 tax year ranging from 10% to 37%. Tax brackets and thresholds vary depending on the taxpayer’s filing status, which may be classified as Single (S), Married Filing Jointly (MFJ)/Qualifying Widow(er) (QW), Married Filing Separately (MFS), and Head of Household (HOH).

In addition to federal income tax, most U.S. states impose their own state income tax. However, there is no state income tax in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Some cities and municipalities may also levy local income taxes, which employees are required to pay based on where they live or work.

The U.S. tax system also includes an Alternative Minimum Tax (AMT) to ensure high-income individuals pay a minimum level of tax. AMT is imposed at a 26% rate on income up to $239,100 (regardless of filing status), and at 28% on income above that threshold. These exemptions phase out for high earners. For the 2025 tax year, the AMT exemption amounts are:

• $137,000 for married couples filing jointly,

• $88,100 for single filers, and

• $68,500 for married individuals filing separately.

An employee’s taxable income generally includes regular wages, bonuses, and certain types of equity compensation, such as stock options. However, the taxation of equity compensation may vary based on the type of plan and vesting conditions. While some travel-related or cost-of-living allowances may be partially or fully excluded from taxable income, this depends on how the benefits are structured and documented. Retirement contributions made to qualified employer-sponsored plans (e.g., 401(k)) are typically made pre-tax, thereby reducing the employee’s taxable income.

Taxpayers can choose between the standard deduction and itemized deductions, depending on which yields a greater tax benefit. For 2025, the standard deduction amounts are:

• $15,000 for single taxpayers and married individuals filing separately,

• $30,000 for married couples filing jointly and qualifying widow(er)s, and

• $22,500 for heads of household.

Itemized deductions may include eligible medical expenses, mortgage interest, charitable donations, and state and local taxes (subject to limitations). Since 2018, unreimbursed employment-related expenses are no longer deductible for most taxpayers. Various tax credits are available, including the Child Tax Credit, which provides financial relief for taxpayers with dependent children.

U.S. tax residents, including U.S. citizens and green card holders living abroad, are subject to federal income tax on their worldwide income. In contrast, non-resident aliens are only taxed on U.S.-source income and effectively connected income (ECI)—income derived from U.S. business or employment activities. In addition, many U.S. states also tax non-residents on income earned within the state.

Tax residency is generally established in one of two ways: either by holding U.S. citizenship or lawful permanent residency (i.e., a green card), or by meeting the Substantial Presence Test. This test is based on the number of days an individual is physically present in the United States. To qualify, the individual must have spent at least 31 days in the U.S. during the current calendar year and a total of 183 days over the current and preceding two years. The total is calculated by counting all the days present in the current year, plus one-third of the days present in the previous year, and one-sixth of the days present two years prior.

Tax Withholding and Reporting

In the United States, employers are required to withhold income tax directly from employees’ wages at the source. This includes federal, state, and, where applicable, local income taxes.

At the federal level, employers must remit these withholdings to the Internal Revenue Service (IRS) and report them using Form 941–Employer’s Quarterly Federal Tax Return. This form must be filed quarterly, with deadlines on April 30, July 31, October 31, and January 31 for the respective quarters.

In addition to quarterly reporting, employers must prepare and file Form W-2–Wage and Tax Statement annually for each employee. The W-2 reports total wages paid and the amounts withheld for federal income tax, Social Security, and Medicare. Employers must provide employees with their W-2 forms and file Copy A with the Social Security Administration (SSA) by January 31 of the following year. Employers must also submit Form W-3–Transmittal of Wage and Tax Statements, which summarizes all W-2 filings.

At the state level, requirements for tax withholding, deposit schedules, and reporting procedures vary by jurisdiction. Some cities and municipalities impose additional local income taxes, which must also be withheld by the employer.

Employees are required to file their individual federal income tax return by April 15 of the year following the tax year. Most states with an income tax have return deadlines aligned with the federal filing date. The U.S. tax year follows the calendar year (January 1 to December 31).

Social Security Contributions

While social protection in the United States is generally less extensive than in most European countries, employers and employees are still required to contribute to several federal social insurance programs. The two primary programs are Medicare (hospital and medical insurance) and OASDI (Old Age, Survivors, and Disability Insurance), both of which are governed under the Federal Insurance Contributions Act (FICA).

FICA Contributions (OASDI & Medicare)

The OASDI contribution rate in 2025 is 12.4% of wages, split equally between employer and employee (6.2% each). The taxable wage base for OASDI is limited to USD 176,100 per employee per year.

The Medicare tax rate is 2.9%, also split equally between employer and employee (1.45% each), with no income cap. An additional 0.9% Medicare surtax applies to employees on earnings over USD 200,000, regardless of filing status. This surcharge is withheld by the employer but is not matched by the employer.

FICA contributions are not deductible from the employee’s taxable income.

FUTA (Federal Unemployment Tax Act) and SUI (State Unemployment Insurance)

In addition to FICA, employers must contribute to the Federal Unemployment Tax Act (FUTA) system. The FUTA tax rate is 6.0% on the first USD 7,000 of each employee’s annual wages. However, if the employer pays state unemployment taxes on time, they may be eligible for a credit of up to 5.4%, reducing the effective FUTA rate to 0.6%.

Employers are also subject to state unemployment insurance (SUI) taxes, with rates and wage bases varying by state. In some states, additional payroll contributions may apply, or employers may be required to carry occupational accident insurance.

Health Insurance Requirements

Employers with 50 or more full-time employees are obligated under the Affordable Care Act (ACA) to provide minimum essential health insurance coverage or potentially face penalties.

Reporting Obligations

FICA contributions are reported through quarterly Form 941 and the annual Forms W-2 and W-3, which are also forwarded to the Social Security Administration (SSA). No additional federal-level filing is required for Social Security.

FUTA contributions must be reported annually using Form 940—Employer's Annual Federal Unemployment Tax Return, due by January 31 of the following year. Quarterly deposits are required if the accumulated FUTA liability exceeds USD 500 per quarter. The same general deadlines apply for most state unemployment tax (SUI) filings and payments.

Despite the at-will nature of U.S. employment agreements, employees are entitled to certain benefits under federal and state law. These include:

• Annual Leave and Public Holidays: No federal requirement for paid vacation or sick leave; benefits depend on employer policy or state law. There are 10 federal public holidays, but private employers are not obligated to offer paid time off.

• Parental, Medical, and Sick Leave: Under the FMLA, eligible employees may take up to 12 weeks of unpaid, job-protected leave per year for childbirth, illness, or caregiving. Eligibility requires 12 months of service, 1,250 hours worked, and employment at a company with 50+ employees. Several states mandate paid family and medical leave through public insurance systems. Paid parental leave is not federally mandated but may be offered by employers.

For more information on employee benefits and other employment requirements in the United States (including severance pay and termination procedures), check out our Global Hiring Guide.

Compensation requirements in the U.S. vary widely depending on state and local laws. The federal minimum wage remains at USD 7.25 per hour, but many states and cities mandate significantly higher rates. Employers must comply with the highest applicable minimum wage. Under federal law, non-exempt employees must receive overtime pay at 150% of their regular rate for hours worked over 40 in a workweek. Some states impose additional or stricter overtime rules. Bonus payments are not legally required and are typically governed by employer policies or individual agreements.

There is no federal regulation stipulating how often employees must be paid; instead, payment frequency is determined by state law. The most common pay frequencies include weekly, bi-weekly, semi-monthly, and monthly—with bi-weekly and weekly being the most prevalent. Wages may be paid by cash, check, or direct deposit, provided the employee has given written consent for electronic payment.

Whether or not employers are required to issue payslips depends on state-specific rules. In most states, employers must provide a pay stub showing details such as hours worked, gross wages, deductions, and net pay. Payslips can usually be issued in either digital or paper format, depending on local requirements.

Under the Fair Labor Standards Act (FLSA), employers are required to retain payroll records for at least three years, including documentation of hours worked, pay rates, and wage payments.