Calculating the costs of US employees is anything but straightforward given the variance of taxes and insurance requirements in each US state. If your US subsidiary corporation has employees in more than one state, your cost calculations will also vary by employee and be dependent on the specific rules of each state. You may want to revisit our previous blog posts on Federal, State, and Local Taxes US Corporations Pay and US Corporate Insurance Coverages to better understand the details of these employee related costs.
There are both compulsory employee costs and optional employee costs (such as health insurance, 401K, etc.) to consider when calculating the costs of your US employees. In our first post on this topic we are going to cover the compulsory employee costs.
Part 1 - Compulsory Employee Costs:
Federal Unemployment Tax (FUTA)
The is a 6% FUTA tax on the first $7K of an employees’ wages. Once an employee earns over $7K the employer will no longer have any FUTA tax liabilities or payments for that employee. Payroll software and third-party payroll service providers should automatically track and calculate FUTA taxes on a per employee basis.
State Unemployment Insurance Tax (SUI)
State unemployment tax rates, cutoffs and calculations vary greatly state to state. For illustrative purposes we will use the new employer rate for the state of North Carolina. In North Carolina new corporations pay a 1% SUI tax on the first $28K of an employee’s wages. Once an employee earns over $28K (in North Carolina) the employer will no longer have any SUI tax liabilities or payments for that employee. Payroll software and third-party payroll service providers should automatically track and calculate SUI taxes on a per employee basis.
Federal Insurance Contribution Act Tax (FICA)
Both the corporation and the employee pay 7.65% FICA in taxes on the first $147K in wages. The corporation is responsible for collecting and paying both the corporation’s and employee’s FICA taxes. Payroll software and third-party payroll service providers should automatically track and calculate FICA taxes on a per employee basis.
Worker’s Compensation Insurance
Worker’s Compensation Insurance is required to be carried by corporations on their employees in almost all states in the US. The rates vary by state, job class code, and company history of claims. Worker’s compensation insurance is typically provided by private insurance companies and priced on $100 of payroll, by job class codes. For illustrative purposes, worker’s compensation insurance for a salesperson (class code 8742) in North Carolina would be .55 per $100 of payroll or .55% on wages.
To create a financial forecasting model that adequately captures the costs of US employees can be quite challenging given the tax cutoff limits on a per employee basis, variance of costs for SUI taxes on a per state basis and the worker’s compensation insurance premium costs on a worker class code and per state basis. Most pro forma financial models take one of two approaches. One option is to create a highly detailed model that builds in the costs and cutoffs, per state, on a per employee basis. The second, more pragmatic approach, is to build in an estimated and blended cost for employees. Whichever method you choose, below is a summary of the compulsorily costs for US employees that may be helpful:
· 15.2% before any wage limits are hit
· 9.2% after FUTA wage limit hit ($7K FUTA limit)
· 8.2% after both FUTA and SUI limits are hit ($28K SUI limit in North Carolina)
· .55% after FUTA, SUI, and FICA limits are hit. ($147K FICA limit)
As an example, let’s look at the monthly costs of an employee that has a $70K salary before they hit any wage limits.
As a second example, let’s look at the monthly costs of an employee that has a $70K salary after their wages have exceeded both the FUTA ($7K) and SUI ($28K in North Carolina) wage limits.
We will have a follow up post on the typical voluntary employee costs in the US next month so you can get an idea of the total employee costs to budget.
If you have questions about employee costs or opening a foreign subsidiary corporation in the United States, feel free to contact us. We will be happy to answer your questions.