USA Tax

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USA Tax Laws and Regulations

Dealing with tax, payroll, and employment regulations for your staff from overseas is a tricky process. The US is no exception, with fines, sanctions and other penalties applying for not complying with the complex and many-layered aspects of taxation.

Global expansion is a great way to grow your business and the USA offers many appealing opportunities. However, the tax laws can be complex and require time-consuming research. By using our PEO-service we will take care of the complicated legwork so that you can focus on your business goals in America.

We have made it our goal to keep track of the latest changes in tax policies to always ensure complete compliance. To keep you informed and updated too we created this guide which includes the basic facts regarding tax regulations in the US.

Overview of Taxes in the US

  • Individual Income Tax: Seven tax rates applied in 2021. 10% to 37%; within each band different taxable limits apply to individuals, joint-filing couples and “Heads of households”. The Biden Administration’s 2022 budget plan proposed a new top rate for high-earners at 39.6%

  • Social Insurance Taxes: Employers’ and employees’ contribution to OASDI, known as ‘social security tax’ - 6.20%(On first US$142,000) of earnings; Hospital Insurance, known as ‘Medicare’ - 1.45%; Surcharge for individuals earning over US$200,000 and joint filers over US$250,000 - 0.9%

  • Corporate Income Tax (CIT): Federal standard rate - 21.0%. States also apply CIT at varying rates up to 11.0%

  • Withholding Tax (WHT): Dividend interest on US-sourced income for foreign individuals and companies - 30.0%

  • Consumption Tax: Applied by states at varying rates, roughly between 4%-10%

  • Capital Gains Tax: In 2021 long-term gains taxed at US$40,001-US$248,300 - 15.0%; Above US$248,300 - 20.0%.
    Short-term gains are taxed as regular income within applicable bands

US Individual Tax – Single, Married

US citizens are taxed on their worldwide income, regardless of where they live. They also must pay federal taxes regardless of which state they live in and whether that state also imposes individual income taxes. The tax year begins on January 1 with returns filed by April 15 of the following year

Here are the following rates for individuals, married joint returns, and the head of families:

Income Tax: Individuals (US$)

  • Up to 9,950 - 10%
  • 9,951 – 40,525 - 12%
  • 40,526 – 86,375 - 22%
  • 86,376 – 164,925 - 24%
  • 164,926 – 209,425 - 32%
  • 209,426 – 523,600 - 35%
  • 523,601 or more - 37%

 Married Joint Returns (US$)

  •   Up to 19,900 - 10%
  • 19,901 – 81,050 - 12%
  •  81,051 – 172,750 - 22%
  • 172,751 – 329,850 - 24%
  •  329,851 – 418,850 - 32%
  • 418,851 – 628,300 - 35%
  •  628,301 or more - 37%

 Head of Family (US$)

  • Up to 14,200 - 10%
  • 14,201 – 54,200 - 12%
  • 54,201 – 86,350 - 22%
  • 86,351 – 164,900 - 24%
  • 164,901 – 209,400 - 32%
  • 209,401 – 523,600 - 35%
  • 523,601 or more - 37%

* The Biden Administration’s 2022 budget plan proposed a new top bracket of 39.6%. This would apply to joint-filing married couples with a taxable income exceeding US$509,300 and individuals with more than US$452,000 in taxable income.

US Individual Tax Rules

  • US citizens are taxed on their worldwide income, regardless of where they live.
  • The ‘Lawful Permanent Resident’s Test’ stipulates that once a resident alien becomes a lawful resident (such as by receiving a Green Card) they become a lawful tax resident, even when they are living outside the US.
  • Citizens must pay federal taxes regardless of which state they live in and whether or not that state also imposes individual income taxes.
  • The tax year begins on January 1 with returns filed by April 15 of the following year.
  • Under the ‘Substantial Presence Test’ individuals are considered tax residents if they live in the US for 31 days in any 12-month period or 183 days over the current year and preceding two years.
  • Non-residents generally pay tax only on their US-sourced income.
  • Employers must be registered to withhold income tax from their US-based employees and remit payments to the Internal Revenue Service after completing form W-4, which legally entitles them to deduct contributions.
  • Employers must also withhold additional state income tax if they, or any of their employees, are located in states where this applies.
  • Additional federal and state taxes are paid to comply with the Federal Unemployment Act.

Other federal and state taxes which may apply to individuals include Inheritance, Estate and Gift Taxes. Property taxes on residential and commercial property apply only at state level.

Consumption Taxes and Customs and Excise Duty:

The equivalent of a value added tax is applied only on certain goods and services at state level and rates can range between 4% and 10% on average.

The Customs and Border Protection (CBP) collects taxes on imported goods on behalf of other US agencies at rates established by the Internal Revenue Service (IRS). These cover such as cigarettes, tobacco, alcohol, fuel.

US Social Security and Statutory Costs

Employee Social Security Taxes

  • OASDI, known as ‘social security tax’ - 6.20% (On first US$142,000) of earnings
  • Hospital Insurance, known as ‘Medicare’ - 1.45%
  • Surcharge for individuals earning over US$200,000 and joint filers over US$250,000 - 0.9%

Employer Payroll/Social Security Taxes

  • OASDI, known as ‘social security tax’ - 6.20% (On first US$142,000 of earnings)
  • Hospital Insurance, known as ‘Medicare’ - 1.45%

Other statutory employer costs include the National Minimum Wage.

The federal minimum wage is US$7.25 per hour, but this varies across the states. Where employees are subject to both state and federal minimums the higher rate applies.

For example, Georgia has a minimum of US$5.15 per hour, but under the Fair Labor Standards Act (FLSA) employers must pay the federal minimum of US$7.25.

US Corporate Taxes

The US' Corporate Tax is set at 21% for 2021 (having been cut from 35% in 2017 in the Tax Cuts and Jobs Act) and is levied against the profits of resident corporations in the US.

This may change as in the Biden Administration’s 2022 budget plan announced in May 2021, it was proposed to increase the rate to 28% at the federal level. Individual states also apply corporate taxes at varying rates up to 11% in addition to the federal rate.

Withholding Tax (WHT): Foreign companies and individuals are subject to 30% withholding tax on US-sourced income from dividends and interest, depending on tax treaties between the US and their home country.

Capital Gains Tax: Long-term capital gains are taxed at 15% from US$40,001 to US$248,300 and at 20% above that. However, the Biden Administration’s 2022 budget plan proposed that long-term capital gains and dividends for taxpayers with gross income over US$1,000,000 would be taxed at the new proposed 39.6% top rate of income tax.

Short-term capital gains are taxed as ordinary income according to the relevant tax band.

Dividend Tax: For single taxpayers up to US$40,000 is tax free, then taxed at 15% for the excess up to US$445,850 and at 20% above that. Jointly filing married couples have a tax-free allowance up to US$80,800, are taxed at 15% for the excess up to US$501,600 and at 20% above that.

Corporate Deductions and Capital Allowances

The Inland Revenue Service (IRS) gives guidance on permitted deductions and allowances. Generally, deductions cover such as genuine business expenses incurred running the business, real estate purchases, salaries, employee health benefits, bad debts, fuel, and excise taxes.

Capital allowances, generally known as ‘tax depreciation’ in the US, allows companies to recover the cost of capital investment or machinery, for example, over a number of years.

IRS rules for tax depreciation of property stipulate it must be used in the business and contribute to income, must have a definite useful life, and be expected to last more than one year.

Avoid risks – make the right move

US tax regulations demand expert advice for incoming foreign companies. Businesses cannot risk stumbling into mistakes over payroll and taxation, running the risk of fines and sanctions. Do not waste time worrying about your move into the US – contact us today.