Payroll Accounting in US Companies

As your business grows, so does the need to hire new employees. This comes with responsibilities like reporting and paying taxes. In this blog, we cover the basics of hiring workers and managing payroll taxes in the United States.

Hiring workers in a US company

The process of hiring a new employee consists of three main stages:

1. Collecting required documentation: ensuring the employee is eligible to work.
2. Filling out necessary forms: properly documenting employee information.
3. Submitting employment notification: reporting the hiring to the relevant state agency.

Let’s dive into each stage.

Collecting data and documentation

Due to strict policies on immigration and employment in the US, workers need to provide documentation proving their eligibility. One key form is Form I-9, which the employee must fill out between accepting the job offer and their first day of work. Failure to complete this form can result in significant penalties.

The required documents to complete Form I-9 fall into three categories:

• List A (Proof of identity and work authorization)

This includes documents like a US passport, Green Card, or Employment Authorization Document (EAD).

• List B (Proof of identity)

This can include a driver’s license, state ID, or school ID with a photo.

• List C (Proof of work authorization)

This could be a Social Security Card without work restrictions, a US birth certificate, or a document issued by the Department of Homeland Security.

For companies registered in E-Verify, an electronic system managed by the SSA and USCIS, employers can verify the employee’s identity and work authorization directly.

Another key document is Form W-4 (Employee's Withholding Certificate). The employee must fill this out to determine how much federal tax should be withheld from their paycheck. They can also update this form annually to reflect changes like marriage, divorce, or dependents.

Employment notification

Once an employee is hired, the employer must notify the State New Hire Reporting Agency. This must be done within 20 days of hiring, although some states may have different timelines. The information helps track child support payments, social benefits, and fraud prevention.

Payroll and tax withholding

Payroll taxes in the US involve multiple levels of taxation (federal and state) and can vary based on the company structure, employment status, and personal details of the employee. Below are key considerations.

Taxation based on business structure

For Limited Liability Companies (LLCs), which are the most common type of US business, the number of owners determines how the business is taxed:

• Single-Member LLC (SMLLC): Taxed as a sole proprietorship.
• Multi-Member LLC: Treated as a partnership for tax purposes.
• S-Corp or C-Corp: If the business files the appropriate forms with the IRS, it can elect to be taxed as a corporation.

Types of federal taxes

Employers must withhold and pay several federal taxes:

• Social Security Tax (12.4% split equally between employer and employee, up to a wage limit).
• Medicare Tax (2.9%, split equally). There’s an additional 0.9% Medicare Tax on wages exceeding $200,000.
• Unemployment Tax (FUTA), paid by the employer (6.0% on the first $7,000 of wages).

State taxes vary significantly, so it's crucial to consult a tax advisor for specific guidance.

Federal and state tax filing

Employers are responsible for collecting, administering, and paying both federal and state taxes. Federal taxes can be paid through EFTPS (Electronic Federal Tax Payment System), which allows for 24/7 payments and scheduling up to a year in advance.

Federal tax deadlines

The due dates for federal taxes differ based on the type of tax and the company's designated payment schedule. For example:

• Social Security and Medicare Taxes: paid either monthly or semi-weekly.
• Unemployment Tax (FUTA): paid quarterly when the tax liability exceeds $500.

State tax payment schedules vary, and deadlines are state-specific.

Payroll tax reporting

Federal payroll tax reports are standardized, regardless of where the business operates. Some key forms include:

• Form 941: Filed quarterly to report federal income tax withheld, Social Security, and Medicare taxes.
• Form 940: An annual report of Federal Unemployment Taxes (FUTA).
• Form W-2: Provided to each employee at the end of the year, detailing their total wages and tax withholdings.

Employers must adhere to strict filing deadlines to avoid penalties.

Final thoughts

Hiring workers and managing payroll in the US can be complex, particularly when accounting for federal and state tax variations. To ensure compliance and avoid costly mistakes, it’s advisable to consult professionals experienced in US payroll and tax regulations.

For personalized advice and support with hiring and payroll management in the US, consult the experts at SellerSail.