The U.S. represents a staggering 25% of the gross world product, and it remains the largest in terms of nominal GDP at $19.42 trillion. In light of these numbers, it’s easy to see why a company would want to expand to the U.S. However, how you support that expansion in terms of setting up a legal entity, hiring staff, taxes, employee benefits and redundancy can be complex.
We spoke to Mark Robbins at Safeguard Global about his knowledge and experience of helping UK companies expand internationally. Their considered view is that as your company evaluates options and finalises a strategy, there are our five important considerations to keep in mind to help ease the process.
1. Establishing a Legal Entity
To legally employ and pay workers, businesses must set up a subsidiary company, or legal entity within the U.S., and this typically takes two to three months. Companies are also required to open a U.S. bank account, which generally takes four to six weeks. A Federal Tax ID number, or Employer Identification Number (EIN), must also be acquired. This allows you to hire employees and participate in other business-related activities, as well as allow the IRS to identify your company’s financial transactions. After this one-time process has been completed, companies receive what’s commonly referred to as “Articles of Incorporation.” However, organisations are also required to register their company in each state they wish to hire employees. Frequent in-person meetings, or the accumulation of a significant percentage of your firm’s revenue in certain states may also require you to register across multiple states. The process for establishment, as well as reporting and filing requirements, will vary by state.
We also spoke to GTM Global’s US attorney partner, Tom Thorelli of Thorelli & Associates based in Chicago, about some of the additional important legal considerations for UK companies setting up in the US. You can check out what Tom had to say here.
There are three primary options for businesses looking to hire U.S. nationals as employees:
- W-2: This is the standard engagement for full-time employees, where federal, state and any other taxes owed are withheld from the employee’s pay and filed to the IRS on their behalf. This is the equivalent to PAYE in the UK. Independent contractor (1099): Employees hired as independent contractors are typically paid a gross amount, and it is their responsibility to pay income tax on earnings. 1099s must be genuine independent contractors and not misclassified employees. Misclassification in the U.S. has resulted in an estimated $2.72 billion in missed tax for the U.S. government, according to the Government Accountability Office. Governments at both the federal and state levels are working to clamp down on this practice.
- Employer of record: This is a cost-effective method for employers looking to explore the U.S. market or employ small pockets of employees across multiple states. It negates the need for the lengthy setup processes discussed previously, handles all HR and payroll administration, and provides employee benefits and insurances that are discussed below.
- Visas: For organisations looking to transfer employees from international offices into the U.S., a registered legal entity is a necessity. L1A and L1B visas allow for intracompany transfers of executives, managers and those with specialised knowledge into the U.S. dependent on a checklist of stringent requirements being met. The E1/ E2 visa allows for foreign nationals of a treaty nation to enter the U.S. for the purpose of carrying out international trade. The E1/E2 may be more appropriate for owners of smaller organisations and entrepreneurs. We recommend speaking with a specialised immigration attorney before pursuing a U.S. employment visa.
There are over 260 federal tax codes in the United States. Once you include state, county and city codes, this number leaps into the thousands. Employers will need to become familiar with the process in each state. You’ll be required to register with the department of revenue in each state you are engaging workers, as well as ancillary labour agencies, which can assist with state unemployment tax. State Unemployment Tax and Federal Unemployment Tax are employer burdens owed to the IRS. Each company will be given an individual rate based on a variety of factors, including longevity and experience as an employer. Consequently, companies that have recently formed will generally incur a higher rate compared with their more established counterparts. When you consider that employer taxes are due based on where the work is performed, and the employees’ taxes are owed based upon where they live, it soon becomes clear as to how the United States has earned its reputation as having one of the world’s most complex tax systems.
- Healthcare: Foreign employers expanding into the United States will need to be mindful of the lack of publicly available healthcare systems that they may be familiar with back home. The Affordable Care Act (ACA), or Obamacare, provides a basic level of healthcare for employees of U.S. companies; however, coverage is limited and it is unlikely that the majority of your employees would be content solely with this coverage. Additionally, once a company reaches 50 employees, they are required to provide supplemental health coverage to their employees. Regardless of size, companies will still be liable to contribute to administration and filing fees toward the ACA. Utilising a broker to source a healthcare plan for employees is one of the most common routes for employers looking to secure health coverage for their workforce. For those pursuing an employer of record solution, a variety of healthcare options will already be in place for employers and employees to select from.
Basic, intermediate and comprehensive coverage plans are the most common, as are providing auxiliary health plans that include dental and vision. U.S. law requires that the employer contribute at least half the cost of the most basic plan, regardless of what plan the employee chooses. For example, if you have a basic plan costing $500 per month, and a comprehensive plan costing $1,500 per month, and the employee elects for the $1,500 plan, the employer must contribute at least $250 of this amount. If they wish, the employer can opt to contribute the full amount, which can assist attracting and retaining talent.
- Pension: Employees have the option of contributing part of their gross earnings into what is commonly known as a 401(k) plan. The plan is tax-qualified, with tax-deferred on the contributions within the account until retirement. As of 2018, the maximum contribution that can be made pre-tax to a 401(k) plan is $18,500. Depending on the plan, employees can choose where to invest their money based on available options. Employers are under no obligation to provide a contribution or match their employee’s contribution. However, offering this benefit to employees can help with your recruitment efforts.
- Insurance: Workers compensation is required to cover claims from employees for incidents that may happen during work activities, and they will generally cover any lost wages and medical expenses. Each industry is assigned its own classification code, and insurers use each code to ascertain the risk in a company’s type of work. Naturally, organisations engaging in riskier work activities, such as construction, can expect to pay a higher premium for workers compensation. General Liability (GL) and Professional Liability (PL) protect businesses from third-party claims arising from any general business practice or errors caused by your workforce. GL protects against claims involving injury or damage to an individual or property as a result of the actions of a worker. PL is protecting against claims resulting from advice or professional services provided by your workforce. Employees operating under the employer of record model will be covered by the providers’ insurances. For employers establishing themselves, setting up and managing workers compensation, GL, PI and all other types of insurances across all 50 states are likely to cost around $500,000.
When hiring employees, it’s important to ensure that all employment contracts adhere to both federal and state laws. There may also be a requirement to observe city laws, particularly when it comes to overtime. For example, California has approximately half a dozen overtime rules that must be observed, dependent on the type of employee. And in New York, employees working in an administrative or professional capacity and earning over $50,000 per year are exempt from overtime. Although the United States has a reputation for being “employer-friendly,” especially compared to other countries, ignoring regulations can often land employers in trouble, particularly when it comes to terminating employees. Each state has its own laws regarding termination, including requirements to pay compensation and other entitlements, as well as for claims related to discrimination.