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This is how payroll works in the US

This is how payroll works in the US

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In this post, we will give you a context of what is happening in terms of salaries in Latin America, and we will tell you how payroll works in the American giant. If you are thinking of having employees in the USA this may be of interest to you. 

Let's talk about minimum wages in Latin America and the United States. And let's solve some questions: What are the requirements for entrepreneurs in the world who want to do business in the United States and want to hire a payroll? Why is it important to hire the payroll service (payroll management), and how does it benefit the operation of your business? 

The first thing you should know is that the United States is a federated country, which means that autonomy is a determining factor when it comes to salary policy; the government administrations are the ones who set the rules of the game, and an example of this is the tax policy that organizations must follow, both federal and state.

But let's get into context, while in the state of Arizona the minimum hourly wage is US $12.80, in California it is US $15. 

One factor that will be a determining factor in the preparation and presentation of contributions and salary withholdings will be, for example, whether your employees are single or married, but we will talk about that later. 

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What is certain is that this year, in some US states, the minimum wage increased significantly, CNN headlined: "At the beginning of 2022, the minimum wage increased in 21 US states". 

This may be a good indication of where you want to set up your business. Minimum hourly wages were left as follows: District of Columbia US $15.2; California US $15; Washington US $14.49; Massachusetts US $14.25; New York US $13.2; Connecticut and New Jersey US $13; Florida US $11 and list goes on. Ranking lowest on the list are: North Carolina with US $7.25 and Georgia and Wyoming with US $5.15. It’s important to clarify that the minimum monthly wage in the United States is US $1,187.33.  

Now let's look at the minimum wages in Latin America, for January 1, 2022 (calculated by month): Ecuador is the country in the region with the highest minimum wage: US $425; followed by Chile with 350,000 Chilean pesos, about US $411; Panama US $365; Mexico increased by 22 % the minimum wage, that is, it went from 141.70 to 172.87 Mexican pesos per day, about US $256 per month; in Colombia this year the minimum wage remained at one million Colombian pesos, which is equivalent to about US $244 (excluding transportation subsidy); Peru and Argentina with US $233 and the list goes on. At the end of December, the Brazilian government increased the minimum wage by a little more than 10% to 1,212 reais, equivalent to about US $214.

Last in the ranking, with an extreme difference, is Venezuela with US $2.18 per month. According to the portal Bloomberg Línea, a Venezuelan citizen could barely buy a dozen eggs or half a kilo of ground beef with this salary, however, the phenomenon of dollarization, although not official, continues to be, according to this same portal, the option most used by the population in the face of the devaluation of the bolivar and the shortage of banknotes.

Now that we are in context, we will explain how payroll works in the United States. 

Not without first mentioning a phenomenon that we consider important and that was news in May 2021 after the famous restaurant McDonald's Corp, raised around 10% the salaries of its employees who went from, per hour, an average of US $11 to US $17, a phenomenon resulting from the decrease in labor that led to the pandemic. 

How does payroll work in the US? 

The first thing you must do is to register the company with the Ministry of Finance for the filing and payment of labor contributions (withholdings). Once the company is registered, you must perform the same process with each of the employees. Finally, you must comply with the quarterly and annual payroll management obligations at the federal and state levels. These are discriminated as follows: 

  1. Federal Withholding: According to the Internal Revenue Service (IRS), the amount of income tax your employer withholds from your employee's wages depends on the amount the employee earns and, for example, the employee's marital status. If the employee is single, a different form is filed than if the employee is married; the difference is that the married employee files a joint return, while the single employee files a separate return. 

The other determining factor will be your salary, for example, if a data analyst earns US $8,000 dollars per month and is single, the employer will withhold US $1,160 per month.  

This is the only withholding that does not have a fixed charge, we will see that the next ones are defined.  

  1. Social Security: the amount to be contributed will be 12.4% of the gross salary (50% employer, 50% employee). The base salary limit for social security is USD $142,800 for 2021. According to the IRS, Social Security benefits include retirement, survivor and disability benefits. They do not include Supplemental Security payments, which are not taxable.
  1. Medicare: the value to be contributed will be 2.9% of the gross salary and is deducted 50/50 (1.45% for the employer and 1.45% for the employee). This withholding is referred to as hospital insurance. The IRS exposes these two withholdings, Social Security and Medicare, as a single action front, that is why they are reported in the same format (the 941) and their report is made every three months.
  1. Federal Unemployment Tax: also known as (FUTA), is a tax paid only by employers and is filed on Form 940, Employer's Annual Federal Unemployment Tax Return. This tax is equal to 0.6% of the cap on wages up to $7,000. According to the IRS, wages paid to nonresident aliens by any employer for services performed within the United States are generally subject to FUTA tax.  
  1. State Unemployment Tax (SUTA): Also known as SUTA is a type of payroll tax that states require employers to pay. In Florida, for example, it is equivalent to 2.7% and is capped at US$189 on wages up to US$7,000.

 In PRODEZK we are specialists in the declaration, not only in the elaboration and presentation of contributions and salary withholdings, but also in services, for example, accounting, annual renewals, commercial certificates, payroll management, company creation and a service we call flexible space where we provide our clients with a physical address to create and maintain their company active in the USA.

Diego Prieto
Press Officer

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