Payroll Services in the United States

The One Big Beautiful Bill Act, Public Law 119-21, was enacted on 4 July 2025 and created two new deductions for tax years 2025 through 2028. Qualified tips are deductible up to $25,000 a year, for employees in occupations that customarily and regularly received tips – a list of more than seventy occupations finalised on 10 April 2026 and organised by three-digit Treasury Tipped Occupation Codes. Qualified overtime compensation is deductible up to $12,500 for a single filer and $25,000 for a joint one. Both phase out above $150,000 of modified adjusted gross income for a single filer and $300,000 for a joint one.

The definition of qualified overtime is the part payroll teams most often get wrong. It is the premium element only – the excess over the regular rate required by section 7 of the Fair Labor Standards Act, which is the “half” in time-and-a-half, not the whole overtime payment. Overtime paid only because a state law requires it, contractual overtime and premium pay above the FLSA minimum all fall outside it. And the employee must be FLSA overtime-eligible, so exempt executive, administrative and professional staff are excluded entirely.

Neither deduction changed the withholding tables. The 2026 tables in Publication 15-T were updated for the permanent rate structure and the higher standard deduction, not for tips or overtime. An employee who wants the benefit during the year has to file an updated Form W-4; an employer must not adjust withholding unilaterally.

What did change is reporting, and it is mandatory for 2026 wages. Form W-2 gains box 12 code TP for total cash tips reported to the employer, code TT for total qualified overtime compensation, code TA for employer contributions under a section 128 Trump account program, and a new box 14b for the Treasury Tipped Occupation Code. Separate reporting was optional for tax year 2025 and the IRS accepted an unstructured disclosure. From 2026 the payroll system has to decompose overtime into regular-rate and premium components and carry an occupation code against every tipped employee. A system that cannot do the first cannot populate code TT.

The employer’s Federal Insurance Contributions Act liability has two parts. Social Security is 6.2% on wages up to the 2026 taxable maximum of $184,500, a ceiling of $11,439 per employee, matched by the employee. Medicare is 1.45% each with no ceiling at all. On top, the Additional Medicare Tax of 0.9% applies to the employee only once wages pass $200,000 in a calendar year – there is no employer match, and the employer must start withholding at $200,000 regardless of the employee’s filing status, with any over- or under-withholding settled on the individual’s return.

Because Social Security caps and Medicare does not, the employer’s combined FICA rate falls from 7.65% on the first $184,500 to 1.45% on everything above it. Add the unemployment layer, which caps far lower still, and total employer statutory cost drops from roughly 9% of salary at $50,000 to about 6% at $300,000.

That is genuinely low by international standards – a comparable employee costs a Brazilian employer around 51% on top of salary and a Spanish one around 32%. The reason the United States does not feel cheap is that the statutory layer is not where the money goes. Employer-sponsored health insurance is not legally required for most purposes, but for any employer competing for staff it is unavoidable, and it typically adds another 8% to 12% of payroll, plus retirement plan matching and any state paid-leave contribution. A US employment budget built from statutory rates alone will understate the real cost by a wide margin, and that is the single most common error we see in foreign parents’ models.

Federal unemployment tax is 6.0% on the first $7,000 of each employee’s wages, reduced by a 5.4% credit for state unemployment taxes paid, giving a standard net rate of 0.6% – $42 per employee per year, reported annually on Form 940. The credit is reduced where a state has an outstanding federal loan. For 2025 that meant California at 1.2% and the US Virgin Islands at 4.5%.

For 2026 the position is not finally determined until after 10 November. The Virgin Islands repaid its loan on 30 April 2026, leaving California as the only jurisdiction with an outstanding advance – $18.9bn as at 21 August 2026. The potential reduction there is 1.5% with a benefit cost rate waiver, giving net FUTA of 2.1%, or 5.3% without one, giving 5.9%. It is worth knowing which of those is the base case: in 2025 both California and the Virgin Islands applied for that waiver and the Employment and Training Administration determined that each of them satisfied the statutory conditions, so no benefit cost rate add-on applied. Plan on 2.1% net FUTA in California – $147 per employee – and treat 5.9% as the tail risk rather than the even bet.

State unemployment insurance is where the real variation sits, and it is not a rate you can look up once. Each of the fifty states, the District of Columbia and the territories sets its own taxable wage base and its own rate schedule. The base runs from $7,000 in California, Florida, Louisiana and Puerto Rico up to $78,200 in Washington, with Hawaii at $64,500, Idaho at $58,300 and Oregon at $56,700 – an eleven-to-one spread that makes the state an employee sits in matter more than their salary. New employers pay a fixed statutory entry rate, typically 1% to 3.5% and higher in construction, for two or three years, after which the rate is recalculated annually from the employer’s own claims history within a schedule that also flexes with the state trust fund’s solvency. Rates reach above 12% in the widest state.

Unemployment insurance is employer-funded everywhere except Alaska, New Jersey and Pennsylvania, where employees contribute too. And workers’ compensation is a separate, wholly employer-funded, state-mandated insurance in every state except Texas, the only one where private coverage is optional – a Texas non-subscriber must notify the state and file annual reports, and gives up the exclusive-remedy defence in exchange, which exposes it to negligence claims.

Eight states levy no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Everywhere else there is a state withholding obligation with its own tables, its own certificate and its own filing calendar. Several states then have local income taxes underneath – Pennsylvania’s local earned income tax, Ohio’s municipal taxes, New York City, Maryland’s county piggyback, and city or occupational levies in Missouri, Kentucky, Indiana, Alabama and Colorado. For a multi-state employer this is the layer that generates the most registrations and the most missed filings.

The fastest-moving layer is paid leave. Mandatory state disability or paid family and medical leave contributions now exist in around eighteen jurisdictions, each with its own rate, wage cap, employer-share threshold and start date. California’s SDI is 1.3% employee-funded on all wages with no ceiling. Washington’s PFML total premium rose to 1.13% for 2026, split roughly 71% employee and 29% employer, with employers under fifty exempt from the employer share, and Washington also runs the separate WA Cares long-term care premium at 0.58% of all wages. Massachusetts is 0.88% in total for employers with twenty-five or more covered individuals. Colorado’s FAMLI fell slightly to 0.88% split evenly, with employers of one to nine remitting only the employee half. Connecticut is 0.5% employee-funded. New York’s PFL is 0.432% employee-funded with an annual maximum of $411.91.

Three 2026 changes matter. Minnesota Paid Leave started on 1 January 2026, with premiums and benefits both live and the first premium payment due 30 April 2026; the employer pays at least half. The District of Columbia’s employer rate jumped from 0.26% to 0.75%. And Maryland’s FAMLI has been delayed again – payroll deductions now begin 1 January 2027 and benefits in 2028, so there is no Maryland obligation in 2026 at all. Rhode Island cut its TDI rate to 1.1% but raised the wage base to $100,000; Delaware’s benefits began in January and Maine’s in May.

Federal employment taxes are reported quarterly on Form 941 and annually on Form 940, and deposited either monthly or semi-weekly depending on a lookback period rather than on the employer’s preference. Accumulate $100,000 of undeposited liability and the next-business-day rule applies immediately, overriding whichever schedule you were on. Deposits go through EFTPS. Forms W-2 and W-3 are due to the Social Security Administration by 31 January, and the electronic filing threshold is ten returns of all types combined – low enough that almost every employer files electronically. New hires must be reported to the state within twenty days, and Form I-9 must be completed for every employee, with E-Verify mandatory for federal contractors and in a number of states.

The Affordable Care Act employer mandate applies to any employer averaging fifty or more full-time equivalent employees. It requires an offer of minimum essential coverage that is both affordable and of minimum value, tested against an affordability percentage that is reset annually, and it is enforced through two penalties under section 4980H – one for failing to offer coverage at all and a smaller one for offering coverage that is unaffordable or inadequate. Compliance is evidenced by Forms 1094-C and 1095-C. For a foreign parent hiring its first fifty US employees, this is the threshold that changes the nature of the obligation, and it is measured on full-time equivalents rather than headcount.

Employment in the United States is at will. There is no statutory notice period, no statutory severance and no general redundancy payment. What does exist is the WARN Act, which requires sixty days’ notice of a plant closing or mass layoff by employers with a hundred or more employees, plus a set of state mini-WARN acts with lower thresholds – New York’s applies at fifty employees. Final paycheck timing is set by state law and varies from immediately on termination to the next regular payday. And COBRA gives departing employees the right to continue group health coverage at their own cost, with notice obligations that sit on the employer.

One structural question worth settling early: PEO or payroll provider. A professional employer organisation becomes a co-employer and files under its own federal identification number, which simplifies multi-state registration but ties your workforce to their arrangement and their benefit plans. A managed payroll provider files under your own EIN and state accounts, which keeps the employment relationship and the plan choices with you. Neither is wrong; they are different structures, and moving between them mid-year creates wage base restart problems that are worth avoiding.