United States: Employment Tax Basics And Paths To Compliance

Last Updated: December 11 2017
Article by Alev Fanny Karaman

When non-U.S. entities expand to the U.S., they face several issues, all of them new. These include the legal form under which business will be conducted in the U.S., certain elections for U.S. income tax purposes, filing obligations and disclosures of certain information relating to the non-U.S. owners, deciding whether to hire local employees or employees that have a background both in the U.S. and the country of the parent company, determining comparable U.S. wages to wages paid for the same job in the country of the parent, and many others. Last but not least, the newly created U.S. subsidiary must also comply with U.S. employment tax requirements relating to their employees.1

If set up correctly, compliance is generally straightforward. Non-compliance often arises because certain payments made to employees are not identified as wages. Once non-compliance is identified, the matter becomes substantially more complicated and the burden on the U.S. subsidiary is considerable.


The term "employment taxes" broadly refers to the income tax and social security taxes that must be withheld by employer's on an employee's wages.

Code §3402 requires employers to deduct and withhold income tax on the amount of wages that are paid to employees. Similar rules may exist at the state and local levels. For this purpose, the definition of wages is broad and the fact that an individual no longer is an employee at the time of payment is immaterial.2

"Wages" are generally defined as any remuneration for services performed by an employee for his or her employer, including the cash value of all remuneration (including benefits) paid in a medium other than cash.3 This is where issues generally start for non-U.S.-owned subsidiaries. The name by which the remuneration is actually designated is immaterial. Wages include the following:4

  • Salaries
  • Fees
  • Bonuses
  • Commissions on sales
  • Commissions on insurance premiums
  • Pensions
  • Retired pay

An employer is liable for the payment of the tax whether or not it is collected from the employee by the employer.5

In addition to income taxes, an employer must withhold employee Federal Insurance Contributions Act ("F.I.C.A.") taxes from an employee's wages.6 The employer is liable for these taxes with respect to all wages paid to each employee whether or not it is collected from the employee.7 The employer is also liable for employer F.I.C.A. taxes8 and must withhold Federal unemployment tax ("F.U.T.A.").9

F.I.C.A. taxes are divided into old-age, survivor, and disability insurance ("O.A.S.D.I.") and hospital insurance ("H.I.") taxes.10 The employee's part of F.I.C.A. taxes must be withheld by the employer at a combined 7.65% rate,11 6.2% for O.A.S.D.I. and 1.45% for H.I. An additional 0.9% tax must be withheld on wages in excess of $250,000 for joint filers (the "Additional Medicare Tax").12 The maximum amount of wages subject to F.I.C.A. is $127,000 in 2017.13

F.U.T.A. is withheld at a 6% rate on the first $7,000. No limit on withholding exists for FU.T.A. purposes.14

Generally, employers must file Form 941, Employer's Quarterly Federal Tax Return, to report quarterly F.I.C.A. and income tax withholdings.15 The filing deadline is the last day of the month following the end of each quarter. F.I.C.A. and income tax deposits must be made either monthly or semi-weekly.16

F.U.T.A. is reported annually on Form 940, Employer's Annual Federal Unemployment Tax Return,17 which must generally be filed by January 31 of the following year.18 F.U.T.A. taxes must generally be deposited with an authorized financial institution by the last day of the month following the end of any calendar quarter in which the employer's undeposited tax liability exceeds $500.19

Additionally, employers must file Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements, with the social security administration by January 31 following the calendar year of the withholdings and provide employees with copies B, C, and 2 of Form W-2 by the same date.20


1 The author would like to acknowledge the contribution of Michael A. Zimmerman of Kane Kessler in the preparation of this article.

2 Treas. Reg. §31.3401(d)-1.

3 Code §3401(a).

4 Treas. Reg. §31.3401(a)-1(a)(5).

5 Treas. Reg. §31.3403-1.

6 Code §§3101 and 3102.

7 Treas. Reg. §31.3102-1(d).

8 Code §3111.

9 Code §3121(b); Treas. Reg. §31.3301-1.

10 Code §3101.

11 Code §§3101(a), 3111(a), and 3101(b)(1).

12 Code §3101(b)(2).

13 Code §3121(a)(1); S.S.A. Notice, 81 Fed. Reg. 74,854 (Oct. 27, 2016).

14 Code §3121(a)(1).

15 Treas. Reg. §§31-6011(a)-1(a)(1) and 31.6011(a)-4(a).

16 Treas. Reg. §31.6302-1.

17 Treas. Reg. §31.6011(a)-3(a).

18 Treas. Reg. §31.6071(a)-1(c).

19 Treas. Reg. §31.6302(c)-3(a).

20 Treas. Reg. §31.6051-1(d)(1).

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