A company newly founded in the USA – no matter what form of company it is – has a number of points to consider. One of the most important is that it needs to hire new employees in the US. This requires registration as an employer with the US tax authority IRS. There you get the important FEIN number (often called only ONE number). Furthermore, you have to register with the local authorities. Where appropriate, the employer may also be required to take out employee accident insurance or health insurance. In addition, many other provisions must be observed. This also applies to avoid discrimination of any kind, as well as to minimum wages, employment contracts, company guidelines and the payment and reporting of payroll tax.

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Hiring employees in the USA – Introduction

If you set up a company in the USA for which you also need personnel, then you should also evaluate information about the applicable employment law there beforehand. But other civil law contexts can also play an important role here. Finally, the different legal requirements of the individual states are also relevant. But no matter what the impact of these regulations may be, in the USA, case law, which arises from court rulings, also counts. Coupled with the sometimes considerable claims for damages, which one may have to bear if one acts outside these rules, all these aspects are of enormous importance.

That’s why we provide you with an overview of the most important criteria you should consider when hiring employees in the US. Because although in the USA as an entrepreneur generally acts with a significantly higher entrepreneurial risk than in Germany, the profit achievable is ideally much more rewarding there.

Hiring employees in the US – Labour Law in the USA

Let’s start with the most important aspects of employment law that you should know before hiring employees in the US.

2.1. Application for a FEIN number

In order to hire employees in the USA, an employer must first apply for a tax number at the highest tax authority of the federal government, the IRS. This then gives a Federal Employer Identification Number, which is generally abbreviated to FEIN. Other common abbreviations are EIN (Employer Identification Number) or TIN (Taxpayer Identification Number). In any event, this number will henceforth apply permanently to the applicant company.

FEIN serves to identify the employer and thus to assign withheld payroll taxes, which we will discuss later.

2.2. Registration with the local authorities as an employer

In order to hire employees in the USA, you are also obliged to report to the labor authorities of the state (State Labor Offices) by filling jobs with new employees. Local authorities may also be involved. Because even there you have to register as an employer for tax purposes. Thus, the tax identification serves in the dutiful payment of the wage tax to be withheld.

2.3 Accident insurance for employees

If necessary, there may be a legal requirement that an employer must take out accident insurance. This should grant employees compensation in the event of damage. This is why this insurance in the USA is called worker’s compensation insurance.

2.4. Installing statutory hangouts

In order to help workers claim their rights, there are federal and state regulations for affixing standardized displays. These notices explain the employment rights to which employees are entitled. For example, explanations about the minimum wage may be content of such a poster.

Once you have completed all the formalities required in advance, you can now look for an employee. When selecting applicants for a job, however, certain points must be taken into account.

So you should be very careful that you do not make a decision based on discrimination. It does not matter whether, for example, an ethnic, age-related or gender preference is included in the selection of applicants. If such a connection exists with the preferred recruitment of an employee and a competitor becomes aware of it, then this can give rise to a lawsuit. And such a lawsuit has often been very costly for employers in the United States in the past.

3.2. Ask only permitted questions

We would like to add the reminder that only permitted questions should be considered when collecting applicant data, but at the latest during an application interview. For example, questions about a planned or existing pregnancy are as taboo as the faith community to which one may belong or the sexual preferences of the candidates. One should follow the guideline that one only has to evaluate the qualifications of an employee if one wants to know whether applicants are suitable for the intended work. After all, it is only about the future fulfillment of the benefits requirements that the employer expects. Everything else should be secondary.

3.3. Examination of the work permit of new employees

An important point to consider when hiring employees in the US is that they also have a work permit. Because if you as an employer unknowingly or even knowingly hire an employee who does not have a corresponding work authorization, you have to expect penalties. At worst, this can also be criminally relevant.

3.4. Background Check of applicants

In the USA, a background check of shortlisted applicants for a job is quite common. However, there are understandably also high legal requirements here. For example, this is only legal with the consent of the candidates. Since this is a potentially delicate task, many US companies hire professional service providers.

Good specialists are also worth gold in the USA and therefore expect a reasonable return for their work. So if the consideration by the employer decides whether a professional joins a company as an employee, then this should definitely be taken into account. Finally, this also contributes to the fact that the employee makes his services available to the company as permanently as possible.

The amount of the wage or salary is only one aspect of showing attractiveness as an employer. The other, flanking option is to offer other benefits. This can include, for example, taking on health insurance or providing a car. Some special benefits are even tax deductible, such as contributions to a health or pension insurance. However, it is important to ensure that these voluntary bonuses do not give rise to discrimination. Therefore, it makes sense in principle to offer such bonuses to all employees.

But even with low-end remuneration, you as an employer should know some guidelines. So you should know that in most states there is a legally fixed minimum wage. This may depend on the activity of the employees. Of course, each federal state has its own legislative options.

4.2. Additional costs on wages and salaries

As in Germany, there are numerous additional costs that an employer pays for its employees in the USA. So you should also pay attention to this if you want to hire employees in the USA. For example, the statutory expenses for social security, unemployment insurance and worker’s compensation insurance are included. Contributions to private pension schemes could also be incurred. Thus, the contribution of non-wage labour costs can account for up to 30% of the actual remuneration, although most of it is based on voluntary benefits.

Hiring Employees in the USA: Contract of Employment & Formalities

5.1 Conclusion of the employment contract

As in Germany, there is no obligation to conclude a written employment contract in the USA. However, especially in the USA, due to the generally low state regulations in civil law, it often makes sense to draft a contract in writing. This is the only way to incorporate into the Treaty all aspects that could eventually end up in court, so that there is no doubt as to the interpretation of the Treaty. This also applies or even in particular to employment contracts. For example, labor disputes in court are quite widespread in the USA. However, this is also due to the fact that instead of a strongly regulatory civil law, case law is applied in the USA. Therefore, one usually also lets a lawyer examine contracts.

However, if both parties refrain from drawing up a written employment contract, then the employee receives at least a similar document called engagement letter. It contains the start of work and information on the amount of the remuneration.

5.2. Handing over the Staff Guidelines

Furthermore, the employer gives the employee a work regulations, the employment handbook or manual. On the one hand, this document contains some of the employment contractual provisions, such as working hours including overtime, holidays, bonuses or termination. On the other hand, company goals can also be content of the manual, including ethical ones, which are equally effective in dealing with each other and externally. Here, too, a legal examination of the content should be considered. In addition, from time to time a review is useful to ensure that the guidelines always comply with applicable law. Of course, this also applies to all other documents with a legal reference.

5.3. Presentation of employment identification documents

If no examination of the work permit of new employees has yet taken place during the application process, this must be made up shortly after entering the company. So make sure that all related checks take place according to the specifications. For this purpose, the new employee must first complete Form I-9. It provides basic data, such as name, address and social security number. The employer must now be able to keep the completed form for at least four years and present it on request.

Within the first three working days, the employee must then identify himself with valid identity documents. Incidentally, this may also be fulfilled by presenting a driving licence and other documents.

5.4. notification of new employees to the federal labor authorities

Finally, as an employer, you register the new employee with the labor authorities of the state. This also applies if you hire a previously employed employee who has left more than 60 days ago. This is the responsibility of the authority of the state in which the company has its registered office. The deadline for this requirement is 20 days after the start of work. Otherwise, there are penalties.

Incidentally, the background to this reporting obligation is the search for parents who are late in their maintenance obligations towards their children.

5.5. Withholding and payment of payroll tax

Although the payroll tax is by no means part of the non-wage costs, it is also an important point to consider as an employer in the USA. However, the laws enacted by the individual states also play an important role. For this reason, we confine ourselves to explaining the most important or even uniform regulations in this regard.

On the one hand, as an employee, you have to fill out the W-4 form. This is about the amount of the tax advance payment, which the employer retains from the wage or salary in order to transfer it to the financial administration of the federal government. The employer submits this form to the federal authority.

Secondly, the employer is obliged to submit the W-2 form to the federal authority. In doing so, he reports to the Federal Tax Office the amount of the income tax to be withheld, which is attributable to the employee’s wage or salary.

Finally, a comparable declaration may also be expected to the tax authority of the state, provided that it has made its own rules for tax advance payment.

The corresponding payments to the finance funds then take place at federal level in the monthly cycle. At the level of the federal states, however, different periods can also be decisive, which can be provided in weekly, two-week, two-month or three-month intervals.

In parallel with the payments of the input taxes, which are addressed to the IRS, a quarterly reporting of the amounts paid takes place. For this purpose, Form 941 is used for each employee. In addition, an annual declaration must be made by Form 940. But first you have to submit a copy to the employee no later than the last working day in January of the following year. And by the end of next month at the latest, you have to send this form to the IRS.

Since the field of payroll and payroll tax deduction is quite complex, many employers prefer to hand over these activities to service providers.