A Beginner’s Guide to the US Payroll Process

Authored By: Bhaskar
Bhaskar Singh is an experienced legal researcher known...

Relishing a well-developed and flourishing economy, the US lays down complex payroll processes and methods that highly differ from other nations.

As of 2024, 133.34 million full-time employees cover 62.70% of the USA population.

When, it comes to organizing expenses, withholdings, and deductions for such a large number of salaried employees, US payroll is very costly and includes complicated regulations.

Streamlining a timely and accurate payroll process is crucial to motivate the workforce make employees feel valued, and ensure positive results.

If you want to improve or, make your present financial position strong, ensure no inconsistencies or loopholes exist in the payroll procedures.

Well, most US companies choose to outsource payroll management to avoid any kind of discrepancies and minimize the risk of errors, and late processing.

Saving overhead costs and precious time, complying with standards, and ensuring accuracy, are additional competitive advantages of outsourcing payroll operations.

Stuck, or failed, creating and managing a well-methodical payroll process? Don’t worry if you have not yet, got the right solution to align your payroll management.

This guide provides you, with a customized approach to understanding payroll and the factors affecting its processing and management in the US.

First, let’s understand, what is, payroll processing.

What is Payroll Processing?

Total wages paid to employees in return for services they perform, for the company is what defines a payroll. It includes not only the employee’s salary but also the calculations related to deductions, taxes, and benefits.

Employees can get payments weekly, bi-weekly, or monthly depending on the payroll requirements of the business.

You can initiate payroll processing manually through accounting software, or by outsourcing payroll processes.

Managing payroll continuously and precisely must not be compromised at any cost to exercise a healthy bond with employees and streamline the business accountant’s role.

Most importantly, the US payroll is processed based on rules and laws directed by FSLA (Fair Labor Standards Act), a law enacted in 1938 that sets minimum wage, overtime pay eligibility, recordkeeping, and child labor standards, crucial for ensuring fair labor practices and avoiding legal penalties.

Payroll taxes taken from the paycheck of every employee contain social protection and Medicare taxes, also known as FICA (Federal Insurance Contributions Act), which requires employers to withhold a portion of employees’ wages and match these contributions to fund Social Security and Medicare programs, supporting retirees, disabled individuals, and those in need of medical care.

Tax deductions highly differ depending on salary, number of dependents, status of filing, and multiple other factors.

The calculation, of payroll is done considering the components, such as social safety, medicare insurance, federal income taxes, state income taxes, and so on.

Now, let’s quickly, have a quick look at the Typical Payroll Cycle.

Understanding Typical Payroll Cycle

Salaried employees are generally paid a fixed amount each pay period, as outlined by the United States Department of Labor (DOL). A typical Payroll Cycle is the total time between days of payment, varying from a week to a month.

The four most common pay frequencies in the United States are weekly, bi-weekly, semi-monthly, and monthly.

These schedules determine how often employees receive their paychecks, with each frequency offering its own benefits and considerations depending on the needs of the business and its employees.

Among these, bi-weekly payroll processing—where employees are paid every two weeks or after 10 business days—is particularly prevalent.

The choice of this or any other pay frequency often depends on a combination of state rules and regulations, business needs, industry practices, and the types of employees being paid.

Know About Payroll Scheduling

Every company sets a pay period for its employees and the frequency at which the payment is made.

Depending on the business structure and each employee’s priorities, various industries specify and take, into account critical benchmarks for payment.

For eg., most businesses pay their employees weekly, biweekly, semimonthly, monthly, or on fixed dates.

Like, if we talk about the USA payroll, employees usually get their payments every other week, on a particular weekday.

Payment regulations highly vary, from state to state; although the majority of states opt for a semi-monthly payroll for their employees.

If, the business is not affected by state laws, selecting a pay period well-matching your industrial and staff needs is preferable.

For every business, taking into account the costs is most important while determining the pay period and frequency; the bigger the pay frequency will be, the more the cost of, payroll processing.

Outsourcing payroll processing services benefits businesses, in deciding on a systematic and well-organized payroll schedule. Many organizations working with remote or overseas employees also evaluate EOR cost factors to understand how employer of record services can impact overall payroll and compliance expenses.

Crucial Taxes Involved in Payroll

Deductions of payroll taxes from the employee’s paycheck are imposed to offer some perks, such as social safety, health insurance, and unemployment insurance.

Payroll taxes are charged as, per the standards held by relevant government bodies; for eg, FLSA, FICA, and FUTA.

US payroll consists of the following taxes:

1. Medicare

Medicare Health Insurance (HI) includes healthcare benefits and treatment for people suffering from severe health problems.

Employers and workers give 1.45% of their earnings for health insurance making a total of 2.9%.

Medicare tax is paid, in the form of self-employment tax or withheld from an employee’s paycheck as in the Social Security tax.

You can also refer to it as the hospital insurance tax.

2. Social Security Tax

Social Security taxes finance retirement, disability, and survivorship benefits, which are, received by US citizens annually from the Social Security Administration.

The rate of Social Security Tax is 12.4%. An employer is required to contribute 6.2% of the employee’s income.

Both employer and employee contribute 6.2%  to fulfill the 12.4% of the OASDI (Old age, Survivors, and Disability Insurance) fund.

3. Federal Unemployment Tax

FUTA (Federal Unemployment Tax) is a national law that sets a supplementary tax on employers on the present income and payroll taxes.

Employers are liable to pay federal unemployment tax, on their own but do not have a right to withhold it from the employee’s paycheck.

For the first $7000, the rate, of federal unemployment tax is 6%.

Important US Payroll Regulations

International Revenue Services (IRS) governs and implements the U.S. federal tax laws, whereas, the Department of Labor (DOL) spotlights labor standards ensuring workers’ right to fair, secure, and positive working environment.

Adhering to the guidelines and standards directed by the IRS and DOL helps businesses maintain the accuracy of accounting functions and escape punishments.

We have listed some of the primary USA payroll regulations for your clear understanding

1. FICA (Federal Insurance Contributions Act)

FICA (Federal Insurance Contributions Act) is a U.S. national payroll tax.

This Act instructs earning individuals to contribute a part of their salary to finance Social Safety and Medicare programs. With this, you get entitlement to the earned perks.

FICA emphasizes tracking unlawful acts and stopping activities, like money laundering, funding terrorists, and escaping tax.

The overall FICA tax rate is 15.3%, which is a combination of the Social Security tax and the Medicare tax. Here’s a breakdown:

• Social Security Tax: 12.4% of wages, up to a certain wage base limit.
• Medicare Tax: 2.9% of wages, with no wage base limit.

For employees, half of this amount (7.65%) is typically withheld from their wages, while the employer pays the other half. Specifically, 6.2% goes towards Social Security and 1.45% goes towards Medicare. Employers are required to match this contribution, making the total FICA tax 15.3%.

Additionally, there is an Additional Medicare Tax of 0.9% on wages above a certain threshold, but this is only applicable to the employee and not matched by the employer.

2. FUTA

Federal Unemployment Tax Act (FUTA) streamlines the national share of unemployment insurance (UI) and costs for job service management in every state.

The Act directs employers to contribute to state and national unemployment programs to provide a payment source to those who are jobless.

An employer directly pays the tax under FUTA, the tax paid here does not amount to a deduction from the employee’s paycheck.

The FUTA stands as an exception if the employer takes benefit of the family or agricultural income.

3. FSLA (Fair Labor Standards Act)

National law in the USA, FLSA (Fair Labor Standards Act) underlines benchmarks for minimum pay, overtime earnings, records maintenance, and child labor.

FLSA applies to full-time and part-time employees in the private industry and national, state, and regional governments.

A non-exempt employee is authorized to a minimum wage of $7.25/hr, and extra time pay of 1.5 times the actual pay under the FLSA for work finished after 40 hours a week.

Non-exempt employees must be paid overtime at 1.5 times their regular hourly rate for any hours worked over 40 in a workweek, as mandated by the FLSA.

Necessary Paperwork for Processing USA Payroll 

Arranging several documents before initiating the US payroll process is essential. Employers are required to report payroll taxes and wages to the IRS and other tax authorities regularly.

The organized documents have to be further presented to the relevant government bodies, and the company will also keep a copy with itself for evidence of payment to devise financial statements.

Businesses get assistance from Payroll outsourcing service providers in gathering, assembling, and presenting all elementary documents included in processing the US payroll.

Check out the list below for identifying the basic documents required to process payroll in the USA:-

Personal Details of Employees

• Form W-2 (Details about annual wages, bonuses, and withheld taxes of Employees)
• Form W-4 (The amount to be withheld from the paycheck of an employee for federal income taxes/ Withholding certificate of the Employee) 
• Form W-9 (Requesting the correct taxpayer identification number and certification)
• Form I-9 (Cross-checking the identity and employment proof of Employees)
• Form 941 ( Payroll taxes reporting collected from each employee along with federal income taxes, social safety taxes, and medicare taxes)
• Form 1099 (Used for reporting payments made to independent contractors.)
• Employment Application
• Details of the Bank
• Medical insurance forms 
• Documents for Retirement plan

In a Nutshell

The laws and regulations of the US payroll process are elaborated and too complex to understand.

Hiring an in-house staff can be costly, and time-consuming, and you cannot also expect expertise from them.

If you are also looking for, some top-notch talents, or a viable solution to scaling up your payroll management in the US, Invedus, offers global payroll experts matching your business requirements.

Now, processing payrolls as, per the standards set out by relevant government authorities is not a challenging task with our payroll specialists.

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