Foreign businesses planning to expand or begin operations in the U.S. face a new world of opportunities. There are several aspects to consider when setting up payroll, as facilitating payroll comes with complex regulatory requirements on a federal, state, and local level. Navigating myriad payroll laws and requirements can be challenging, and it is critical to stay compliant and avoid costly fines and penalties. This article details several key factors for foreign businesses to consider when planning to establish payroll operations in the United States.
Federal Registration & Establishing a Legal Entity
The first step to registering for payroll services will be registering with the IRS and obtaining an employer identification number (EIN). The EIN is required to withhold federal income taxes, Social Security, and Medicare taxes. The EIN also will be required to register with state and local tax agencies and the U.S. Department of Labor. Once the company has received the EIN number, the company must register with the Secretary of State in the state where the business operates and open a U.S. bank account. Read our recent FORsights™ article, “Entering the U.S. Market: Essential Steps for Business Success,” for more information on initial setup in the United States.
State Registration
Payroll requirements vary by state and locality. In addition to registering with the state to do business, companies also must register for payroll tax withholdings within the states where they hire employees. The general state payroll tax requirements include state payroll withholding tax accounts, workers’ compensation, state unemployment, and disability insurance. Additional payroll withholdings may be required depending on the state. Once the business has registered with the state for the payroll accounts, a unique tax ID will be provided. The payroll tax ID account numbers will be required to set up accounts with payroll providers and file the quarterly and annual payroll tax returns. It is common for employers to have employees located in states where the company does not conduct business. However, the company is still required to register for the state withholding accounts where the employee is located, even though the company does not have a physical presence in a particular state. It is essential to speak with a tax professional to help ensure the business stays in compliance with the state.
State Locality Registration
Additional local state registrations may be required depending on the city, county, or township laws. The locality requirements can be based on the employee’s location, company size, and employee type. Multiple tax account codes may be required for each state as some states have more than 100 local income tax codes; this will ultimately depend on where the employees are located within the state. The types of local state taxes include city/local income tax, commuter taxes, and school district taxes. Once the required local taxes are determined, the company must register with respecting local state tax agencies and obtain an additional tax account code for payroll purposes.
Payroll Software
A foreign company should consider its business needs, along with current and future global mobility situations when selecting a payroll software. The payroll software is the “engine,” where the payroll data is entered, helping ensure accurate calculation of taxes and deductions. With many payroll software packages to choose from, it may seem like a sea of options. There are various elements to consider, such as cross-border employment arrangements, immigration risk management, and global payroll coordination. Also, foreign businesses often have employees from the parent country who will provide services in the U.S. and create shadow payroll situations. The majority of payroll providers are not equipped to handle such services, so it’s important to speak with your accountant to go over options when selecting a payroll provider.
Payroll Frequency & Pay Timing
Payroll frequency is the pay schedule that employees are paid. The common pay frequencies used are biweekly and semimonthly. A semimonthly payroll frequency is paid twice a month and has 24 pay periods per year. A biweekly pay frequency is paid every other week and can have 26 pay periods per year. Employers may adopt less common pay frequency schedules, such as weekly or monthly, but some states such as California and New York require that employees are paid at least twice a month. Pay timing refers to the time that can transpire between when wages are earned and when those wages are paid. Each state has its own rules regarding pay timing. Please consider consulting with a professional for assistance with proper pay frequency and pay timing schedule implementation.
Compliance With Reporting Requirements
Once the business has been set up to process payroll, there are payroll tax filings that will be required to be filed quarterly and annually. Payroll laws are updated periodically and can change at any given time. It is important to stay up to date to help maintain good standing and compliance.
Workers' Compensation Insurance
Workers' compensation insurance is required for various industries, even companies that only have office/administrative type employees, as it covers a wide range of work-related injuries. Workers’ compensation may be purchased through the state or set up through a private insurance agency.
Tax Withholding Requirements
Employers must withhold federal income tax, Social Security, and Medicare taxes from employees' wages. State and local tax withholding requirements vary by jurisdiction. Social Security and Medicare taxes are paid by the employer and employee. The current tax rates are 6.2% for the Social Security tax and 1.45% for Medicare tax. The Social Security tax has a wage base limit that is subject to tax for the year. This places a cap on the amount an employee will pay in taxes and the amount changes year to year. The wage limit for 2025 is $176,100. Employees may be subject to an additional Medicare tax of 0.09% if their income exceeds $200,000 for a single tax filer or $250,000 for a Married Filing Jointly tax filer. Employer tax requirements may vary as certain taxes are only applied to the employer, such as the Federal Unemployment Tax Act (FUTA). The FUTA tax rate is 6%. The tax applies to the first $7,000 paid to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. The state wage base may be different based on the applicable state's rules.
Employee Pay Stubs
Employee pay stubs or earnings statements reflect the gross-to-net amount paid to an employee during a specific time period. The requirements for the information to be displayed on a pay stub vary by state. The example below shows the common payroll taxes withheld for an employee based in New York.
Employee Onboarding
As your business begins to hire new employees, it is the employer's responsibility to ensure that all necessary documentation has been completed prior to onboarding a new employee. The common documents required for onboarding include:
- Employee Handbook Acknowledgment
- I-9 Form
- Federal W-4 Form
- State W-4 Form, if Applicable
- Employment Contract or Offer Letter
- U.S. Bank Account Information
Compliance With Employment Laws
Employment laws are different from payroll laws because employment laws cover employee rights and responsibilities, such as the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, and minimum wage pay laws. State employment laws vary by state and companies must follow guidelines for all states that have employees.
Employee Benefits
Employer-sponsored benefits are commonly offered to employees in the U.S.; the types of benefits offered can vary by company type and employer preferences, as they are not required. Establishing employee benefits allows employers to attract and retain talent and keep up with industry standards. Certain benefits require minimum requirements to set up, e.g., health insurance plans require a minimum of two employees to establish an account, and 401(k) plans require the plan administrator to have a Social Security number to establish an account. Common employee benefits in the U.S. include:
- Health Insurance
- Dental & Vision Insurance
- Retirement & Pension Plans
- Stock Options & Equity Plans
- Vacation Paid Time Off, Holiday Paid Time Off, Parental Leave, & Sick Leave
- Accident & Critical Illness Insurance
- Life & Disability Insurance
How Forvis Mazars Can Help
Setting up payroll for a foreign-owned entity in the U.S. involves several legal, tax, and regulatory steps, but the process can be manageable with proper planning and support from a knowledgeable Outsourced Accounting Services team. To establish a strong foundation for U.S. payroll operations, businesses must consider tax withholding requirements, employment law compliance, reporting requirements, and employer sponsored benefits. If you have questions or would like more information on how we can help your business, reach out to a professional at Forvis Mazars.
