Expanding to the US: Important US Payroll Considerations
There are many aspects involved in planning a successful U.S. expansion. One area that merits a priority focus is U.S. payroll and related human resource matters. Review these important U.S. payroll considerations before expanding to the U.S.
Key payroll considerations
While each company has different circumstances to plan and manage during their U.S. expansion, it can be beneficial to start with these high-level payroll considerations. Your U.S. accountant and payroll providers can help you complete your U.S. business plan based on your unique situation.
1. Use a payroll provider in the U.S., not an accountant
Many foreign companies have their accountants process and manage payroll in their home country. In the U.S., most companies use a payroll service provider (PSP) for U.S. payroll. A PSP is an organization that specializes in processing payroll and providing cost-effective services. These include calculating net pay, paying employees, collecting and remitting payroll tax, withholding tax to the federal and state governments and filing quarterly and annual payroll tax returns.
In addition to offering these basic services, many PSPs also provide a range of HR consulting services including coordination with affiliate employee benefit and workers’ compensation insurance providers. Many PSPs also offer cloud-based applications that integrate services, automate the completion of key employee forms and give employees direct access to their payroll records and tax forms.
When selecting a PSP for your new U.S. operation, it is important to identify one familiar with foreign-owned start-up companies who can help you understand payroll differences and U.S. employer responsibilities. If your U.S. operation will start with only a few employees, you need to use a PSP without a required minimum number of employees.
Although PSPs process payroll, they do not advise on tax treatment. This is why your accountant will still play an important role in your payroll from a tax perspective. Accountants with the right experience can advise you on expatriate exemption for social security taxes and equalization calculations. This is important to ensure the expatriate employees are managing their U.S. tax responsibilities correctly from the start, protecting both the company and employee from unintended consequences.
2. Manage employee benefit requirements and cost
Your U.S. workforce, including both U.S. and expatriate employees, will require you to provide employee benefit packages including health insurance and retirement benefits. U.S. employers are required by law to provide some benefits, particularly if you have more than 50 employees. Other benefits are provided as a customary practice in the U.S. to attract employees. However, compared to your home country where the government may provide healthcare and retirement benefits, most U.S. benefits will be your cost and responsibility. The challenge will be to offer a benefits package with the coverage desired by your employees at a cost that fits within your U.S. budget.
Medical health insurance is a high-cost benefit and is the most desired by U.S. employees. If you start out with a small number of employees, the first challenge will be to find a policy for a single employee or small group. The next challenge will be to balance the benefits with the cost. The employer may choose to pay the entire cost of the policy or ask employees to contribute to the cost through a payroll deduction.
The most common retirement benefit offered to employees in the U.S. is a 401(k) plan. This allows employees to contribute to the plan on a pre-tax basis as a payroll deduction. In addition to the cost of setting up and administering the plan, an employer’s cost usually includes a matching contribution for the employees, commonly 3% or more of gross pay. Vesting can be put in place for the employer’s matching funds to incentivize the employees to stay with the company longer to receive the benefit.
3. Understand the pros and cons of a PEO
Professional employer organizations (PEOs) are third-party firms that manage payroll and human resource operations for businesses. In some ways, a PEO is a step beyond a PSP in the level of services provided. Instead of simply automating your payroll operations, PEOs act as co-employers to your employees. They relieve businesses of certain responsibilities like tax filing, regular human resources maintenance and employee benefits management. This can be a great option for foreign-based companies expanding to the U.S., and can address some of the payroll obstacles mentioned above. Here are some pros and cons of acquiring a PEO as a part of your expansion effort.
- Management of benefits: One significant advantage of using a PEO is giving your employees access to the PEO’s benefit plans. Your employees may be able to join a larger PEO group of employees for health insurance coverage, which typically means better coverage at lower rates. PEOs can also offer better retirement plans such as a 401(k), including a larger selection of quality investment options.
- Human resources: Because foreign-based companies can’t retain the same human resource practices from their home country for U.S. based employees, a PEO can handle all U.S. based HR operations and free up the cost of outsourcing yet another aspect of your business.
- Payroll management: A PEO will manage all your payroll operations just as a PSP would, and is just as reliable for all payroll related tasks.
- One provider: A PEO is a single provider for all payroll and human resource needs which is effective and efficient. Even though PSPs now offer a fuller range of services including access to benefit plans and HR consulting, they usually work through affiliates which means multiple providers.
- Minimum employee requirements: Most PEOs have a minimum number of employees required for their services. If you have 10 or fewer employees, it may be difficult to find a PEO to work with you. While a PEO is a great option for outsourcing payroll, benefits and HR services, if your U.S. expansion plans include a small number of employees, you may have to wait until you are more established with a larger employee base.
- Overall cost: To evaluate the cost of using a PEO, you need to understand the PEO service fee and other potential cost savings obtained through their services. If the PEO works with companies with few employees, it is more likely to charge a per employee price to cover their total costs and profit on their services. If the PEO pricing is based on a percentage of payroll, be sure to factor in bonuses and nontaxable compensation planned for your employees to understand the true cost. The cost savings from access to a PEO’s larger benefits plans compared to what you would pay on your own as well as through multiple providers could have a big impact on the overall cost of using a PEO.
- Quality: There are many PEOs in the market, which is why it is important to get references and understand their services and fees. Accountants experienced in working with foreign companies expanding to the U.S. can help refer you to the right PEO based on your circumstances.
4. Review the impacts of working from home
The global pandemic has dramatically increased the number of employees working from home, which has impacted employers. Here are two important considerations that should be included in the planning stage of your U.S. expansion:
- Tax consequences: If you have employees located in different states or cities from your main business location, you could be responsible for additional state payroll tax registrations and state tax filing. Your business plan and operating budget should include the cost of compliance for additional state filings and tax liabilities.
- Physical footprint: If your workforce will continue to work from home indefinitely, you can rethink the physical location needed for your business. Particularly in the early days of expansion, this could save you money if you can operate with a smaller physical location or none at all.
As a leader in global expansion consulting, we can help you navigate the accounting and tax aspects of U.S. payroll. If you need help with any part of your U.S. expansion journey, please reach out. For additional information, call us at 248.208.8860 or contact us today. We look forward to speaking with you soon.