Payroll in the USA

If your company has employees, there is no way around payroll, and the USA is no exception. Just as in European countries, employers deduct the required taxes and social contributions from their employees' wages and add their own mandatory share. Keep in mind that the rules and contribution rates can differ depending on the state where the company and its employees are based.

On this page we cover everything about payroll and give you an overview of how it works in the USA. We walk through the individual federal and state contributions and how much they are. We also look at how retirement savings and health insurance are handled and which forms have to be filed.

1Payroll basics

Payroll is not optional: it is mandatory for every company. Depending on your size and headcount, that can mean a lot of paperwork. Correct records, withholding and on-time payment of taxes and contributions matter, otherwise you risk stiff penalties.

Payroll covers filing the individual forms, issuing pay statements and records of the amounts, taxes and deductions withheld, as well as actually paying the relevant authorities. To run payroll correctly (and for many other things), the company needs an EIN, its identification number.

2Payroll tax vs. income tax

As an employer, you have several taxes to keep track of in payroll. On top of the usual employment taxes shared by employee and company, there is income tax, which the employer withholds from the employee's pay. While payroll taxes usually come at a fixed percentage, income tax is calculated based on income. The higher the salary, the more has to be withheld. To find out how you can legally lower your own income tax as an expat, see our tips on saving taxes in the USA.

3Income tax in the USA

The first component the employer has to withhold and pay over for each employee is income tax. It exists not only at the federal level, but also at the state level and in some places at the local level. Depending on the company, these taxes are paid either monthly or every two weeks.

1. Federal Income Tax: Federal income tax, the Federal Income Tax, is the first one the company has to withhold. Form W-4 determines how much to withhold for each employee; the employee provides it to the employer. At year end, the company files Form W-2. It documents the amounts withheld, and the employee needs it for their personal tax return.

2. State Income Tax: Income tax usually has to be paid at state level as well. Rates range from 2.95% in Indiana (flat rate 2026) up to 13.3% in California. Only 9 states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

3. Local Income Tax: In some states, cities or municipalities also levy a local income tax, paid by the employee and withheld by the employer. In some cases the company has to bear the tax itself (for example in Colorado). States with local income tax include Delaware, Iowa, Michigan, New Jersey, New York and Pennsylvania. The calculation differs from state to state: some places base it on actual income, others apply a fixed percentage.

4Payroll tax in the USA

Payroll taxes are not borne by the employee alone; the company pays its share too. They include the FICA taxes. FICA (Federal Insurance Contributions Act) is the social insurance law and is made up of contributions for Social Security and Medicare, paid by both employee and company. Finally, there is unemployment insurance at the federal level and, where applicable, the state level (FUTA and SUTA), which the employer pays.

1. Social Security: This FICA tax is levied at the federal level. On annual earnings up to $184,500 (wage base 2026) it totals 12.4%, split equally between employer and employee (6.2% each).

2. Medicare: The second FICA contribution, set uniformly at federal level, is Medicare. It is a government health insurance program that covers hospital and care costs from age 65. The total Medicare contribution is 2.9%: the employer pays 1.45% and the employee the other 1.45%. For annual earnings above $200,000, an additional 0.9% must be withheld from the employee's pay.

3. FUTA and SUTA: Federal unemployment tax (FUTA, Federal Unemployment Tax Act) is calculated on wages and paid by the employer. It comes to 6% a year on the first $7,000. Companies that already pay state unemployment tax (SUTA, usually between 2% and 5%) can credit it up to a maximum of 5.4%, which brings the effective federal FUTA rate down to 0.6%. The employer pays these amounts either annually or quarterly. Proof of FUTA paid is filed on Form 940 in the first quarter.

5Other taxes and employer costs

Unlike in much of Europe, in the States it is common for employers to pay for their employees' private health insurance . Typically the company covers about 85% of the premium. Under the Affordable Care Act (ACA), companies with more than 50 employees are required to offer them health insurance, with tax penalties for failing to do so. Smaller companies are exempt, but if they offer coverage anyway, they can benefit from tax credits.

Some US states also have mandatory disability insurance, which is either withheld from the employee's wages or paid by the company. The states with such insurance are California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.

Employers should also look into other local and municipal taxes. These are levied by cities and municipalities and vary widely in both purpose and amount.

Important: Take particular care with local and state taxes . Just because your company is based in a state without extra taxes, or abroad, does not mean you don't have to pay them. These taxes follow your employees. If you have staff in a US state, you must comply with that state's laws and find out in advance which contributions are mandatory. How much your choice of state already matters at formation is explained in our guide on how to form a US LLC as a non-resident.

6Payroll statements and pay stubs

Although issuing pay stubs in the USA is not required by law, most employees get them from their employers. A pay stub sets out the full payroll statement: pay before and after all deductions and exactly what work the employee did in that period.

The pay stub also includes the company's and the employee's details and a precise breakdown of the taxes paid.

7Payroll forms

Payroll is more than withholding and paying the right taxes. It also covers the required forms. Before a company can legally employ staff in the US, it first has to register. As part of that, it receives an EIN, the employer identification number. It works like a Social Security number for the company and is used for every tax payment. You also need an EIN to hire new employees and to apply for business loans. These are the key forms for payroll:

• Form W-4: The company needs this form from every employee. It is the basis for calculating the income tax to withhold and authorizes the employer to withhold that amount.

• Form W-2: Completed once a year for each employee. It lists all wages and tax payments (including FICA taxes) for the previous year. The company must send it to its employees by January 31 at the latest, because they need the W-2 for their annual tax return.

• Form 941: The federal return for income tax and FICA taxes withheld and paid, filed quarterly with the IRS. The deadlines are April 30, July 31, October 31 and January 31.

• Form 940: Filed once a year with the IRS for FUTA, the federal unemployment tax. The filing deadline is January 31.

• Other forms depending on the state or for local taxes

8Withholding and reporting payroll taxes

The taxes an employer withholds must be paid to the relevant tax authorities:

• Federal taxes go to the IRS, the US tax authority
• At state level, there are separate agencies and departments that collect the respective taxes
• For local taxes, different local authorities are responsible, depending on the specific tax

There are different schedules for paying the tax authorities, depending on the company and the amount of tax owed. Once the company registers with the IRS, it is assigned its deposit schedule and is notified of any changes.

To meet its payroll tax obligations, the employer must also regularly file the related forms. These include Form 941 and federal payroll taxes quarterly, plus Form 940 and the W-2 annually.

9Other obligations

Payroll does not end with withholding and paying taxes. Another key requirement is to file and keep complete records within the company.

According to the IRS, the US tax authority, companies must keep their payroll tax records for at least 4 years. The states require this too. If the authorities carry out an inspection, the employer must be able to produce these records. They include a range of documents, such as:

• Employee information (name, address and Social Security number)
• Pay period, amount and date of wage payments
• Copies of each employee's Form W-4
• Confirmations and dates of taxes paid
• Copies of tax returns
• Copies of any undeliverable Forms W-2

10Payroll in the USA: what it means for you

At its core, payroll in the USA is not very different from payroll in European countries. In both the US and Europe, employers must withhold taxes from their employees' wages, add their own contributions and pay everything to the relevant authorities. The biggest differences lie in the healthcare system. While government taxes are relatively low, many American companies provide their employees with private health insurance.

In the US, pay close attention to taxation at the different levels. On top of uniform federal taxes, further taxes are due in the individual states and, in some places, to local authorities. Companies should look not only at where the company is registered or has branches, but at where their employees are located.

You can find an overview of US health insurance here. Mount Bonnell Advisors is happy to handle your ongoing payroll: all the details are on the Payroll page, and every tax topic is gathered in our Taxes hub.

In short

• Payroll is mandatory for every company with employees in the US. You need an EIN first.
• The employer withholds income tax at federal, state and sometimes local level, and pays half of the FICA contributions for Social Security and Medicare.
• FUTA unemployment tax is paid by the employer alone: 6% on the first $7,000, effectively 0.6% after the SUTA credit.
• The key forms include the W-4, the W-2, the quarterly Form 941 and the annual Form 940.
• What counts is where your employees work, not where your company is registered. Keep your records for at least four years.

How we help you

• PayrollPayroll, payroll taxes and filings for your employees in the USA.
• Apply for an EINYour company's US tax ID, applied for by us.
• Corporation tax returnForm 1120 and Form 5472 for your US corporation.
• US Tax ConsultationYour US tax question, answered by people who know both sides.