Labor laws and compliance in the United States
This guide has important information for businesses looking to hire employees or contractors in the US. The United States is the third largest country by area as well as population. It’s also the world’s biggest economy. Hiring good talent in the US is not easy. The unemployment rate is at an all-time low. US is the biggest outsourcer for business processes, data entry, digital marketing and other services.
Minimum Wage
$7.25 (federal)
Overtime Wage
$1.5x Regular Wages
Meal Breaks
No federal mandate
Rest Breaks
No federal mandate
Working hours
8 hours/day, 40 hours/week
Salary Payment Cycle
Bi-monthly
Payroll Taxes
Social Security, Medicare
Paid Vacation
No federal mandate
Overtime Hours
Beyond 40 hours in a week
Night Shift Pay
110% of regular pay Between 6PM and 6AM
Holidays
No federal mandate Most businesses give 10 days/year
No Work Days
Saturday, Sunday
A business needs a local entity, usually a subsidiary, in the US to hire locally.
It can take several weeks and a considerable amount of money to set up a subsidiary in the US. You’ll need to register your business name and incorporate your preferred type of entity with a US state. You will need to apply for a Federal Tax ID Number or Employer Identification Number (EIN).
It’s a nine-digit number the Internal Revenue Service (IRS) uses to keep track of your organization’s tax obligations. In some ways, it’s similar to a Social Security number for individuals. You need to file Form SS-4, Application for Employer Identification Number (EIN) to the IRS to get your EIN.
You will also need to get a sales tax permit in states where you will do business in the US.
Opening a company bank account in the US can be quite challenging. Most banks require a resident American to be the signing authority for opening a bank account.
Hiring and paying employees or contractors in the US is a complex process. You need to comply with social security, Medicare and other employer obligations. United States has one of the strongest enforcement systems for corporate governance. You will need a good lawyer and CPA to help you with compliance.
There are legal differences between employees and contractors in the US. Incorrect classification of a contractor as an employee or vice versa can land you into legal troubles.
The national minimum wage in the US is $7.25 per hour. Each state has its own minimum wage law that can be higher than the national minimum wage.
You must pay the higher of the two rates to your employees. California has the highest minimum wage, at $15 per hour.
While minimum wage law sets the floor, in most cases, you will be paying a much higher salary to your employees. Due to the low unemployment rate and too many opportunities, actual wages top $20 per hour in most while collar jobs. In the technology industry, a competitive salary is in the range of $50 per hour in most cities.
Standard working hours in the US are 8 hours per day or 40 hours per week. The standard workweek is Monday through Friday but can be changed depending on business need.
The Fair Labor Standards Act (FLSA) defines which roles are eligible for overtime pay in the US. In general, most managerial and executive roles are exempt from overtime payment. Most creative and professional positions are also exempt.
Overtime pay for non-exempt roles is 150% of the base hourly pay. All contractors or part-time employees are generally entitled to overtime pay.
Employers typically follow a bi-monthly payment schedule, with salaries paid every two weeks.
Salary must be paid in cash, by check, or by direct deposit to the employee’s account at a bank or other financial institution.
Some aspects of payroll processing are regulated by the Internal Revenue Service (IRS) and the Department of Labor (DOL). You must comply with these laws:
- Fair Labor Standards Act (FLSA)
- Federal Insurance Contributions Act (FICA)
- Federal Unemployment Tax Act (FUTA)
In addition, you also have to abide by state payroll processing laws. Each state has its own rules governing minimum wage, payday schedules and record keeping. Payroll compliance in the US can become cumbersome if you have employees in more than one state.
If you have 1-2 employees in one state, you can process payroll manually. You will still need to keep records of things like hours worked, wages paid and worker classifications. But as you add more employees and contractors, you’ll need to use an automated solution for payroll processing.
Before you start processing your payroll, you will need the following documents from your employees:
- W-4 Employee’s Withholding Certificate
- W-9 Employee’s Withholding Certificate – used for contractors or freelancers. You will need this to file 1099-NEC at the end of the year
- I-9 Employment Eligibility Verification
- Medical insurance and retirement plan forms
Classifying employees correctly as employee or contractor is a major issue with US payroll processing. An error can lead to fines from the IRS. If you control only the output or result, then the worker is likely a contractor. If you also control how the work is to be done, then the worker must be classified as an employee.
You can withhold income tax, Social Security tax and Medicare tax only for employees, not independent contractors or freelancers. For employees, you will need to file form W-2.
Employers are responsible for calculating and withholding money for federal, state and local taxes from every workers’ paychecks. It’s determined by the Forms W-4 submitted by your workers and tax rates. In addition, you need to pay federal unemployment tax (FUTA). You will also match your employees’ contribution towards the Social Security and Medicare taxes.
If your employees opt to contribute towards 401K or other retirement plans, you will need to withhold their contribution and deposit in their retirement accounts. If you offer health and other insurance, you will have to deduct employee contribution towards those plans and pay to the insurance provider.
Sometimes, you may have to deduct towards court ordered deductions such as such as child support and alimony.
As you can see, setting up an entity, hiring employees and managing payroll in the US is a complex and costly affair. You’re better off going with an Employer of Record service provider unless you plan to hire a large number of employees.
Individual Income Tax
In the US, domestic income is subject to income tax for both citizens and foreigners. Any foreign income of a resident is also taxed in the US. In addition to the federal income tax, most states and cities also levy income tax on their residents.
The US income tax system follows the progressive structure, meaning people who earn more also pay higher taxes. United States offers married couples the option of filing their tax return jointly.
The federal Family and Medical Leave Act (FMLA) mandates up to 12 weeks of unpaid leave. The FMLA provides up to 12 weeks of unpaid sick, parental and maternity leave for an employee
Employees must have worked for at least one year at the same employer to get this benefit.
There is no national standard for paid or sick leave in the United States.
Nine states and Washington, DC have laws requiring paid family and sick leave.
However, most employers in the services sector offer 2-3 weeks of paid leave. Most employers also offer disability insurance that pays workers during maternity or illness. It’s usually a contributory benefit where both the employer and the employee pay towards the premium.
Most employers give paid time off for some of the popular holidays on the US calendar.
The United States has a comprehensive social security system that offers retirement, disability and medical benefits. Employees are also eligible for unemployment benefits for a limited amount of time of time.
Most employment agreements in the US are “at will” meaning employment can be terminated without any reason by both the employee and the employer. But the standard practice is to give 2 week’s notice or pay to the employee.