It is no secret that the United States employment market offers immense scale and opportunity. With over 162 million individuals on nonfarm payrolls and average hourly earnings climbing past $36, the U.S. is the number one environment in the world for businesses looking to hire top talent and professionals seeking new roles. However, tapping into this potential means facing one of the world’s most complicated tax systems.

If you’re doing business in the United States, the tax structure can feel like a maze. Unlike countries with a single national tax authority, the U.S. operates on a multi-layered system where federal, state, and sometimes even local city governments have the power to impose taxes. 

Thanks to remote work, an employer’s tax obligations are no longer confined to their headquarters; they now extend to wherever employees live and work, known as “tax nexus”.

Let’s guide you through the maze. 

What Is Payroll Tax in the United States?

The two main federal payroll taxes are governed by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).

FICA: Social Security and Medicare Taxes

FICA funds retirement, disability, and healthcare benefits. The responsibility for these taxes is split equally between the employer and the employee: 

  • Social Security Tax: Funds retirement, disability, and survivor benefits. For 2025, the rate is 6.2% for the employer and 6.2% for the employee. Social Security tax applies only to the first $176,100 of an employee’s wages. 
  • Medicare Tax: Funds the national hospital insurance program. The rate is 1.45% for both the employer and the employee. Unlike Social Security, there is no wage limit for Medicare tax; it applies to all of an employee’s covered wages.
  • Additional Medicare Tax: High-income earners are subject to an extra 0.9% tax on wages that exceed $200,000 in a calendar year. It is an employee-only tax, but the employer must withhold it from the employee’s paycheck.

FUTA: Federal Unemployment Tax

FUTA, plus other state programs, provide unemployment benefits to workers who have lost their jobs.

  • Employer-Only Tax: FUTA tax is paid only by the employer. It is never withheld from an employee’s wages.
  • Rate and Wage Base: The FUTA tax rate is 6.0%, but it only applies to the first $7,000 of wages paid to each employee annually. Once an employee earns over $7,000, the employer’s FUTA obligation for that employee is met for the year.
  • State Tax Credit: The federal and state unemployment systems work together. Employers also pay a State Unemployment Tax (SUTA). If you pay your SUTA taxes on time and in full, you can receive a credit of up to 5.4% against your FUTA tax. This credit effectively reduces the federal rate to as low as 0.6%.

Curious how wages compare? Check out our guide on Minimum Wage in the United States.

Overview of Income Tax in the United States

Employers must withhold federal income tax from employee paychecks as a prepayment of the employee’s annual income tax bill. The Form W-4, Employee’s Withholding Certificate, tells an employer how much income tax to withhold.  

Every new employee must complete this form, providing their filing status (e.g., Single, Married Filing Jointly), number of dependents, and other adjustments. The employer uses this information to calculate the correct withholding for each paycheck based on IRS tables in Publication 15-T.

The Progressive Tax System in the United States

An example of the tax rate system in the U.S: A single person with $70,000 in taxable income in 2025 pays 10% on the first chunk of their income, 12% on the next, and 22% on the final portion. Table I illustrates better: 

2025 Federal Income Tax Brackets and Rates

Tax RateSingle FilersMarried Filing JointlyHead of Household
10%$0 – $11,925$0 – $23,850$0 – $17,000
12%$11,926 – $48,475$23,851 – $96,950$17,001 – $64,850
22%$48,476 – $103,350$96,951 – $206,700$64,851 – $103,350
24%$103,351 – $197,300$206,701 – $394,600$103,351 – $197,300
32%$197,301 – $250,525$394,601 – $501,050$197,301 – $250,500
35%$250,526 – $626,350$501,051 – $751,600$250,501 – $626,350
37%Over $626,350Over $751,600Over $626,350

Reducing Taxable Income

An employee’s tax is calculated on their taxable income, not their gross pay. The standard deduction (Table II) is a set amount that individuals can subtract from their income to reduce their tax bill.

For a deeper look at compliance, explore our related guide on Employee Benefits in the United States.

2025 Standard Deduction Amounts

Filing StatusStandard Deduction
Single$15,000
Married Filing Jointly$30,000
Head of Household$22,500
Married Filing Separately$15,000

State and Local Taxes

Each of the 50 states has its own tax laws. An employer establishes nexus in a state simply by having an employee working there, even without a physical office. 

Once a nexus exists, the employer must register with that state’s tax agencies, withhold state income tax, and pay into the state’s unemployment fund. For a company with employees in multiple states, this means managing compliance across many jurisdictions.

State income tax systems vary:

  • Nine states have no income tax.
  • Many states apply a flat tax rate to all income.
  • Most states use a progressive system with multiple brackets, similar to the federal model.
  • Some cities and counties in states like New York and Ohio levy their local income taxes.

Other Employer Responsibilities

Staying compliant in the U.S. requires diligence. These are the core responsibilities every employer must manage:

  • Worker Classification: You must correctly classify workers as employees or independent contractors. Misclassification can lead to back taxes and penalties. 
  • Registration: Every business needs a federal Employer Identification Number (EIN) from the IRS. You must also register with the tax and labor agencies in every state where you have an employee. 
  • Tax Deposits: Withheld federal income tax and both shares of FICA taxes must be deposited electronically, usually through the Electronic Federal Tax Payment System (EFTPS), on a monthly or semi-weekly schedule.
  • Reporting and Filing: Employers must file regular reports. The most common are the quarterly Form 941 (to report income and FICA taxes) and the annual Form 940 (to report FUTA tax). 
  • Annual Wage Statements: By January 31, you must give each employee a Form W-2, which details their total earnings and taxes withheld for the year. Copies are also sent to the Social Security Administration. Payments to independent contractors are reported on Form 1099-NEC.
  • Record-Keeping: Federal law requires you to keep employment tax records for at least four years.

Using a Professional Employer Organization (PEO) service in the United States, which serves as your co-employer and handles all HR obligations, can help you avoid mistakes and fines due to worker misclassification.

Industry-Specific Tax

The U.S. tax code also includes special rules for certain industries:

  • Hospitality: Restaurants and bars have rules for tips. While tips are wages subject to FICA, employers can claim the FICA Tip Credit. This is a business income tax credit for the employer’s share of FICA taxes paid on tips that exceed a limit (based on the 2007 federal minimum wage of $5.15 per hour). This credit is claimed on Form 8846 and helps offset the tax cost on income the employer doesn’t directly pay.
  • Agriculture: Agricultural employers have their own set of regulations. They report employment taxes annually on Form 943 instead of quarterly. Additionally, wages paid to temporary foreign agricultural workers on H-2A visas are exempt from FICA and FUTA taxes.

The Remote People free Global Payroll Calculator helps employers estimate taxes across different limits and locations in the United States. 

Remote People: Your US Payroll Partner

Managing payroll and income taxes in the United States takes close attention to detail and a clear understanding of federal, state, and local rules. The U.S. tax system is layered, and each state has its own regulations. Remote work can add even more complexity. 

Employer of Record (EOR) services in the United States offer an efficient option for international companies that want to hire American or foreign workers without setting up a legal entity. An EOR acts as the legal employer in the U.S., taking care of payroll taxes, benefits administration, work visas, and compliance, while you continue managing your employees’ daily work. An EOR makes it possible to enter the U.S. market quickly and test your business model without the large investment needed to create a subsidiary or branch office.

Remote People’s EOR services are designed to simplify U.S. payroll tax compliance. We handle all federal, state, and local tax duties for you, including registering with tax authorities, calculating and withholding the correct taxes, making timely payments, and filing all required tax returns and reports. With our established systems and expertise in the U.S, companies can stay focused on their main goals while meeting every U.S. employment law and tax requirement.