US HR and payroll: a starter guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll and HR in the United States means navigating federal tax withholding, FICA contributions, at-will employment rules, and a patchwork of state laws — all of which carry real compliance risk if you get them wrong. This guide covers the core mechanics so you can set up a lawful, functional system from the start.
Classifying your workforce correctly
Before you run a single paycheck, you need to know whether the people working for you are employees or independent contractors. The IRS applies a behavioral, financial, and relationship test. Get it wrong — paying a contractor who should legally be an employee — and you face back taxes, penalties, and potential lawsuits.
Employees get a W-2 at year-end. Contractors get a 1099-NEC if you pay them $600 or more in a calendar year. The forms are different because the tax obligations are different. For employees, you withhold income tax and FICA. For contractors, you don't withhold anything — they handle their own taxes.
Federal payroll taxes: what you withhold and what you owe
Every employee fills out a Form W-4 when they start. That form tells you how much federal income tax to withhold from each paycheck. Federal income tax is progressive, running from 10% to 37% across several brackets.
On top of income tax, you collect FICA taxes:
- Social Security: 6.2% from the employee, up to the annual wage base. You match that 6.2% as the employer.
- Medicare: 1.45% from the employee, no cap. You match that too.
- Additional Medicare: A 0.9% surcharge applies to high-earning employees above certain thresholds. Employers do not match this portion.
That means for most employees, you're contributing an additional 7.65% of gross wages on top of what you withhold from them. That employer share is your cost — factor it into every hiring decision.
You report and deposit these taxes using Form 941, filed quarterly. You're also responsible for depositing withheld taxes on a schedule (monthly or semi-weekly) determined by your total tax liability in a prior lookback period. Missing deposit deadlines triggers penalties, so set calendar reminders or let your payroll software handle it automatically.
State taxes and why location matters
Some states have no income tax at all — Texas, Florida, and Washington among them. Others, like California and New York, have their own progressive income tax systems, their own withholding forms, and their own filing deadlines. A few states also have additional payroll taxes, such as state disability insurance or paid family leave contributions.
If you hire someone who works in a different state than where your business is incorporated, you likely have nexus obligations in that state. That means registering as an employer there, withholding that state's income tax, and complying with local wage and hour laws. This is one of the most common compliance traps for growing companies that hire remotely.
Year-end reporting obligations
By January 31 each year, you must:
- Deliver Form W-2 to every employee who worked for you during the prior tax year
- File copies of those W-2s with the Social Security Administration
- Send Form 1099-NEC to any contractor you paid $600 or more
Missing these deadlines or filing incorrect forms results in IRS penalties that scale with how late the correction comes. If your payroll records are clean throughout the year, year-end is straightforward. If they're not, January becomes painful.
Employment law basics every employer should know
US employment is generally at-will, meaning either the employer or the employee can end the relationship at any time, for any reason — as long as that reason isn't illegal (discrimination, retaliation, and so on). At-will does not mean you can fire someone for a protected reason, and it doesn't override a written employment contract if you've signed one.
A few other points worth knowing:
- No federal statutory paid leave. There is no federal law requiring you to provide paid vacation or paid sick leave. Some states and cities do require paid sick leave, so check local rules.
- Non-competes: California prohibits most non-compete clauses. Other states vary significantly in how enforceable they are.
- Federal minimum wage exists, but many states set a higher floor — the state rate applies wherever it's higher.
- FLSA classification: Beyond employee vs. contractor, you also need to classify employees as exempt or non-exempt from overtime rules under the Fair Labor Standards Act. Non-exempt employees must be paid 1.5x their regular rate for hours worked over 40 in a workweek.
If you're managing payroll across multiple countries as well as the US, the complexity compounds quickly. How Mellow runs payroll across six countries on one platform gives a practical picture of how that works in practice.
The moment you bring on your first US employee, every one of these obligations applies. Building the right habits early — clean records, timely deposits, accurate classification — is far less costly than fixing mistakes after the fact.
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