Expanding to the USA: Payroll Tax obligations to be aware

Navigating Payroll Tax Obligations for UK Businesses Expanding into the USA

If you’re thinking of expanding your business across the Atlantic, it’s a good time to consider your payroll tax obligations.

International payroll is complex. As a global business, the responsibility for cross-border payroll lies with you. And, if you get it wrong, you'll be responsible for hefty penalties for compliance breaches.

The USA’s tax systems are especially complicated, spanning federal, state and even city-level tax obligations. Thankfully, there are solutions to ease the compliance burden. You can stay one step ahead by outsourcing your payroll, or by hiring an international payroll provider to streamline the process entirely.

In this guide, we’ll explore how to best navigate payroll tax obligations for UK businesses expanding into the USA — and how to make cross-border payroll as painless as possible.

Understanding US payroll taxes

The US tax system and the UK’s don’t speak the same language. There are innumerable differences, the key being the division of taxes across federal, state, and local levels. This complicated structure demands that businesses adapt to the rules depending on the regions where their employers are based.

The Internal Revenue Service (IRS) is the federal tax agency, equivalent to HMRC in the UK. Before a business starts paying its people in the US, they’ll first need to obtain an Employer Identification Number (EIN) from the IRS. The EIN is similar to the UK PAYE number, and it’s central to all aspects of taxes and payroll obligations.

UK businesses outsourcing their payroll, or using international payroll services, should make sure their provider is knowledgeable when it comes to US federal, state, and local tax laws. A payroll service provider will cover all of these bases, ensuring smoother payroll, no matter where you’re operating from.

Federal payroll tax obligations

For businesses expanding into the US, several key aspects of federal payroll taxes should be on your radar:

• Social Security and Medicare Taxes (FICA): The Federal Insurance Contributions Act (FICA) funds the US Social Security and Medicare systems. Employers and employees each pay 6.2% of wages for Social Security, up to a wage cap, and 1.45% for Medicare, with no cap on wages for the latter. These contributions need to be regularly reported to avoid the risk of penalties. Businesses that decide to outsource payroll can rely on expert knowledge to ensure FICA contributions are properly calculated and remitted.
• Federal Unemployment Tax Act (FUTA): FUTA taxes are paid by employers to support unemployment benefits for workers. The standard rate is 6% on the first $7,000 of an employee's wages. Businesses usually get a credit for paying state unemployment taxes, lowering the federal rate.
• Income Tax Withholding: US employers should withhold federal income tax from employee wages based on the employee's Form W-4, which provides additional information on their tax situation. When setting up your payroll systems, be extra careful to take this into account.

State and local payroll tax obligations

State and local taxes vary dramatically, which adds an extra layer of friction for UK businesses looking to expand into the USA. In the UK, taxes are uniformly country-wide, but in the US, every state has its own payroll tax rules. Many states levy their own income taxes, which employers need to additionally withhold and remit from their employer’s paycheque.

California and New York have among the highest state taxes, while some states like Florida and Texas eschew state taxes altogether. Confusingly, some states also require that employers pay into a state unemployment insurance fund, which diverges from the federal taxation system.

States can also impose additional taxes, such as disability insurance in California, which employers pay on top of regular payroll taxes. Local taxes can also be levied on a city-by-city basis (like New York, for instance, which has its own payroll tax rules) which adds extra friction to your payroll tax obligations.

Payroll reporting requirements

The situation doesn’t become any less complicated when it comes to payroll reporting requirements. US companies need to file several payroll tax forms across the year, for example:

• Form W-2 reports wages and paid taxes withheld for each employee.
• Form W-3 provides an overview of all W-2s submitted.
• Form 940 is to report and pay FUTA taxes (Federal Unemployment Tax Act).
• Form 941 is to report FICA (Federal Insurance Contributions Act) taxes and federal income withholdings every quarter.

It’s an employer’s responsibility to submit these to the IRS, on-time and accurately, to avoid hefty fines for non-compliance. For UK companies tentatively expanding their presence into the US market, outsourcing payroll can be an easier way to manage these complex reporting obligations. International payroll providers such as ADP offer specialist services that cover US tax forms and reporting, ensuring total compliance.

Navigating multi-state payroll tax compliance

In the USA, every state has its own set of tax rules. That makes operating a multi-state business extra challenging. It’s especially tricky for businesses with employees living and working across different states. For example, suppose an employee lives in one state but travels to work in another. In this case, the business will need to seriously consider its tax obligations and whether to withhold and remit taxes for both states.

Many UK businesses discover that this is a bridge too far. Managing multi-state payroll compliance becomes too complex to handle in-house. And it can quickly overstretch their resources and HR functions.

Strategies for managing multi-state compliance, such as using payroll software or consulting with tax professionals, seem like a more practical solution. Trusted providers like ADP help reduce the compliance burden of multi-state filing and reporting, freeing up time for you to focus on your business.

Common pitfalls and how to avoid them

Expanding into the US isn’t without its pitfalls, and it’s easy to stumble into trouble without realising. A common pitfall is the misclassification of employees as independent contractors. Misclassification happens when an employer treats a worker who is an employee under the FLSA as an independent contractor. In the US, contractors aren’t subject to payroll tax withholding, but misclassifying workers can quickly lead to severe penalties from the IRS, plus underpayment of employment taxes.

Another common pitfall is not keeping up with changes in US payroll tax laws. The US tax system changes often, both on a federal and state level, so it’s an employer’s responsibility to navigate these tax obligations to avoid any miscalculations. Global payroll providers like ADP are plugged into the latest news and updates. Their solutions are instant and automated, too, meaning you always stay compliant with the latest regulations.

Conclusion

Expanding into the USA is an exciting prospect for UK businesses. And for many companies, navigating cross-border payroll may not be the first thing that comes to mind when they think of scaling their business across the Atlantic. But, as we’ve discovered, understanding complex state and federal payroll obligations can help set your company up for success. From federal taxes, to state and even city taxes, there’s a lot to think about. Outsourcing your payroll to a trusted global provider like ADP can reduce these big challenges, so you can focus on growing your operations across the Atlantic.