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The United States has long been one of the most enticing markets for global expansion. With 320 million U.S. residents and trade agreements with 20 countries, it boasts an active market of 420 million people. The World Bank ranks the U.S. 6th in the world for ease of doing business, a designation that points to the pro-business orientation of governments at all levels.
It’s also a particularly appealing market for foreign companies, many of which have grown to be among the biggest in the U.S. As of 2022, 75% of the companies listed on the Fortune 500 (376 companies) were from abroad. The U.S. has strong laws protecting intellectual property and courts that grant equal rights to foreign nationals as U.S. citizens.
The 50 U.S. states offer countless smaller markets in large cities, providing a broad choice of entry points, all of which have the potential to reach a national base of consumers. The state of California alone has a gross domestic product (GDP) on par with the entire United Kingdom.
But as enticing as the U.S. market can be, the practicalities of hiring people and paying them compliantly can be equally daunting. The sheer number of regulations and the high level of governmental enforcement point to an essential truth about expanding to the U.S.—the best way to do so is by working with a payroll and payments company with knowledge and expertise in the U.S. that can guide you effectively.
That’s why Papaya Global is proud to announce we’re expanding our role in the U.S. market.
Papaya, a global leader in payroll and payments, has helped thousands of companies expand across borders in full local compliance. It can provide the essential support companies of all sizes need to navigate the complexities of U.S. labor codes and tax laws and deliver payments to employees, tax authorities, and benefits vendors.
The First Steps in Hiring in the U.S.
Papaya Global can help you decide which employment model is best suited to your company, whether your company has its own entity in the U.S. or not. It can also provide payments and management for independent contractors.
A company in the early stages of expansion may want to test the U.S. market through an employer of record (EOR). Under the EOR model, companies can hire and pay teams without opening a local entity. The EOR serves as the legal employer for your team members and handles administrative tasks such as payroll and time and attendance, while you manage the team in their day-to-day activities.
If you have an entity, you hold the liability for payroll and payments to your employees. It makes good business sense to hire a payroll and payments provider like Papaya that can ensure compliance to all regulations such as minimum wage, overtime pay, and benefits. Don’t risk making mistakes and potential fines by trying to figure it out on your own.
Alternatively, you can outsource your workforce management through a PEO as a co-employer. This is a great option for companies that are committed to the U.S. market but don’t have a full grasp of the nuances of payroll calculations, tax withholdings, benefits management, and cross-border payments, or if they want to access better, more cost-effective benefits packages. The PEO takes responsibility for your HR functions. As a co-employer, the PEO takes greater responsibility and liability, usually at a higher price.
Another employment option that often works in tandem with other models is to hire contractors for limited engagements. They can help control costs and access specialized skills for particular projects. However, they must be classified correctly in order to avoid large fines.
For regular employees, EOR, and PEO, your team members must file W-2 forms, which indicates that they are entitled to the suite of rights and benefits reserved for employees according to U.S. law. Independent contractors, who are self-employed, must file 1099 forms, indicating they are responsible for paying their own taxes, are not eligible for employee benefits, and are typically paid a fixed fee or on an hourly basis.
Understanding Taxes
The U.S. has a complicated tax system, partially because of the many layers of taxes involved. There are federal taxes, state taxes, and in many cases, local taxes paid at the municipal level. Labor laws such as minimum wages and overtime compensation also vary from state to state, requiring assistance from an expert to ensure compliance on all levels.
Employers calculate and withhold a range of taxes from employees and then deliver them to the appropriate tax authorities or other entities as required by law—whether they have an entity, EOR, or PEO. These taxes can be broadly grouped into the following categories:
- Federal income tax: Employers are responsible for withholding income tax for employees that filed W-4 forms. The amount of taxed income is calculated based on income level, filing status, and the number of allowances claimed on their W-4 form.
- Social Security tax: Mandatory payroll tax that funds the social security program, which provides retirement, disability, and survivor benefits.
- Medicare tax: Mandatory payroll tax that funds the Medicare program, which provides healthcare benefits for people 65 and older, and for people with disabilities.
- State income tax: Many states impose income taxes, and employers are required to withhold state income tax from employees' wages. The amount withheld is based on the employee's income, filing status, and state-specific tax rates.
- Local income tax: Some local jurisdictions impose additional income taxes. Employers must withhold these local income taxes, if applicable.
The same taxes apply to independent contractors, but since they are considered self-employed, the contractors are responsible for calculating and paying their own taxes, with no withholdings from employers.
At-Will and Multi-State Employment
The U.S. is different from many other countries in that employment is considered “at-will” for both the employer and the employee. This means that a company can terminate employment at any time for any reason that doesn’t violate any social laws, such as regulations against discrimination, etc. The definition of at-will, however, varies from state to state, so it is important to work with experts who know the laws in any particular jurisdiction.
People who work in multiple states or live in one state and work in a different state may also experience payroll complexity. Government regulations typically call for taxes to be withheld according to the laws of the state where the work is carried out. However, many states have reciprocal tax agreements, allowing one state to collect taxes on behalf of a neighboring state.
This issue can come up in the era of remote work, where people are often hired to work for companies based in one state while the employees carry out their tasks at home in another state.
The nuances of cross-state payroll can be daunting, and the chances of errors is high without direct guidance from a local expert.
Don’t Risk Compliance Errors; Papaya Can Guide Your Expansion
Breaking into the enormous U.S. market is a dream for many companies. But the complexity of compliance, especially in the areas of payroll and payments, can be daunting.
The best way to forge a path forward is to work with payroll and legal experts at Papaya Global. Choose the employment model that best suits your company's growth needs, ensure all income and social taxes are withheld properly, feel confident that your contractors are properly classified, and pay your entire global workforce accurately and efficiently.
Don’t risk compliance errors. Work with experts in global expansion.
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Papaya Global is a SaaS fintech company enabling enterprises to master the complexities of workforce management. Papaya's comprehensive technology, known as Papaya OS, is the only global platform that offers payroll and payments as a unified process. Papaya provides an embedded, end-to-end solution for the entire payroll journey—from onboarding to payroll processing to cross-border payment delivery.
