U.S. Payroll and Employer Taxes: The True Cost of an Employee

What a $100,000 employee really costs

Italian finance teams are used to an employer burden of roughly 30% or more on top of gross salary: INPS contributions, INAIL, and the TFR accrual (about 6.91% of pay). The U.S. picture is different. Statutory employer taxes are low, usually 8% to 9% of a $100,000 salary, but the employer typically pays for things the Italian state provides, above all health insurance. The result is a fully loaded cost that often lands around 118% to 125% of base salary for a single employee, and higher when the employer subsidizes family health coverage.

The table below compares one $100,000 salaried, exempt office employee working in New York, Texas and Illinois in 2026. It assumes a newly registered employer (new-employer unemployment rates), single health coverage at the national average employer share, a 4% 401(k) match, and a mid-range payroll platform. Taxes are verified 2026 figures; benefit lines are illustrative and will vary with your broker, carrier and plan design.

How to read the example

• The states differ by only a few hundred dollars on employer taxes, because unemployment wage bases are small. The big differences are on the employee's side: Texas has no personal income tax, while a New York City resident pays state and city tax, which affects the gross salary you need to offer to be competitive (see Compensation).
• New York City employers with large payrolls also owe the Metropolitan Commuter Transportation Mobility Tax (MCTMT). In the NYC zone, the top rate is 0.60% of payroll once quarterly payroll exceeds $437,500, which would add about $600 for this employee. Smaller payrolls pay a lower tiered rate or nothing.
• Family coverage changes everything. KFF's 2025 average family premium was $26,993 with a $6,850 worker share, so an employer subsidy of about $20,000 would push the load above 30%, close to Italian levels.
• Things not in the table: recruiting fees, equipment, bonus, equity, paid time off (a cost of time rather than cash), dental and vision, life and disability insurance, and any employer-paid state leave premiums in WA or MA. Benefits are covered in depth at Benefits.

Federal payroll taxes: FICA and FUTA

Two federal taxes apply to almost every U.S. employee. FICA (Federal Insurance Contributions Act) funds Social Security and Medicare and is split between employer and employee. FUTA (Federal Unemployment Tax Act) funds the federal share of unemployment insurance and is paid by the employer only. Federal income tax is also withheld from the employee's pay, but that is the employee's tax, not an employer cost.

Additional Medicare Tax

The employer must start withholding the extra 0.9% in the pay period in which an employee's wages from that employer exceed $200,000 in the calendar year, regardless of filing status. There is no employer match. The final liability is settled on the employee's personal return (the thresholds there are $250,000 for joint filers and $125,000 for married filing separately), so the employee may owe more or get a credit.

FUTA and credit reduction states

FUTA is 6.0% on the first $7,000 of each employee's wages, but employers that pay state unemployment tax on time receive a credit of up to 5.4%, leaving a net 0.6%, or $42 per employee. When a state borrows from the federal government to pay unemployment benefits and does not repay in time, employers in that state lose part of the credit. This is the credit reduction.

• 2025 (final): the Department of Labor confirmed two credit reduction jurisdictions: California at 1.2% and the U.S. Virgin Islands at 4.5%. Connecticut and New York were at risk but repaid their loans before November 10, 2025. California employers therefore paid 1.8% FUTA on the first $7,000, or $126 per employee instead of $42, with the Form 940 filed in early 2026.
• 2026 (projected, not final): California and the U.S. Virgin Islands are again expected to be affected. California's projected reduction is 1.5% (and could be higher if the state does not obtain a waiver of the benefit cost rate add-on); the Virgin Islands' is 4.8%. The Department of Labor makes the final determination after November 10, 2026. Budget about $147 per California employee for 2026 FUTA and verify the final figure in November.

State unemployment tax (SUTA)

Each state runs its own unemployment insurance program, funded mainly by an employer tax often called SUTA or SUI. It works like an experience-rated insurance premium: new employers pay a standard rate for their first two or three years, after which the rate rises or falls with the number of former employees who claim benefits against your account. Each state applies its rate only up to a taxable wage base, which ranges from $7,000 to more than $78,000.

Your state agency will send a rate notice after registration and each year thereafter (California DE 2088, for example). Always use the notice rather than a published average. Rates for new employers in construction or staffing are often higher.

State employee contributions: disability, family leave and long-term care

Several states run statutory disability or paid family leave programs funded partly or wholly through payroll deductions from employees. The employer's job is to withhold correctly, remit and, in some states, pay its own share. Getting these wrong creates liability even though the money is the employee's.

Practical notes

• California SDI has no ceiling. Since January 1, 2024, the 1.3% applies to every dollar, so a $400,000 executive has $5,200 withheld. Senior hires relocating to California sometimes read this as an error on their pay slip.
• New York DBL and PFL are insured, not state-run. The employer must buy a policy from a carrier or the State Insurance Fund and may deduct the capped employee contributions. Coverage must start after an employee has worked four consecutive weeks for you.
• Washington employees can apply for a WA Cares exemption only in limited cases (for example, certain temporary visa holders or out-of-state residents); keep the ESD exemption letter on file before stopping deductions.
• Massachusetts employers with fewer than 25 covered workers need not pay the employer share but must still withhold and remit the employee share.
• Other states with similar programs include Colorado, Connecticut, Oregon, Rhode Island, Delaware, Minnesota and Maine (the last three starting benefits in 2026), plus Hawaii and Puerto Rico. Check State by state before your first hire in a new state.

Income tax withholding: states, cities and remote workers

U.S. employers act as tax collectors. You withhold federal income tax based on the employee's Form W-4 and IRS Publication 15-T tables, plus state and sometimes local income tax. Nine states have no wage income tax, including Texas, Florida and Washington among our focus states. Illinois has a flat 4.95%, North Carolina and Georgia have flat rates that are being phased down, Ohio moved to a flat 2.75% in 2026, Massachusetts has 5% plus a 4% surtax on very high incomes, and New York, New Jersey and California use progressive brackets reaching 10.9%, 10.75% and 13.3% respectively.

Local income taxes

• New York City taxes residents only, at 3.078% to 3.876%, withheld on the state form IT-2104. A nonresident commuting from New Jersey pays no NYC tax. Yonkers adds a resident surcharge.
• Philadelphia charges a wage tax on residents wherever they work and on nonresidents for days worked in the city. From July 1, 2026, the rates are 3.735% (residents) and 3.425% (nonresidents), part of a five-year reduction plan.
• Ohio cities levy municipal income tax, for example Columbus and Cleveland at 2.5% and Cincinnati at 1.8%, and many school districts add their own tax. Ohio's rules generally tie withholding to the place where work is performed, with a 20-day occasional entrant threshold, so a hybrid employee may need withholding for more than one city.
• Other local taxes to know: Pennsylvania's local earned income tax, Detroit, Kansas City and St. Louis earnings taxes, Kentucky occupational license taxes, Indiana and Maryland county taxes.

Remote workers and reciprocity

The default rule is that wages are taxed where the employee physically works, and the employee's state of residence also taxes them with a credit for tax paid elsewhere. A remote employee in a state where you have no office still makes you a withholding employer there, and typically creates SUTA, new-hire reporting and state leave obligations too. Reciprocity agreements simplify commuter cases: New Jersey and Pennsylvania, for instance, let residents of one state pay only their home state, and Illinois has agreements with Iowa, Kentucky, Michigan and Wisconsin. The employee must file the relevant exemption certificate with you.

The convenience-of-the-employer rule

New York treats a nonresident's days worked from home as New York workdays if the employee works remotely for their own convenience rather than because the employer requires it. A New York-based company with a manager working from Connecticut or Florida can therefore owe New York withholding on all of that person's pay. Delaware, Nebraska and Pennsylvania apply similar rules, and Connecticut and New Jersey apply a retaliatory version to employers based in their states. Document when a remote arrangement is a genuine business necessity (for example, a role designed to cover a territory).

Pay frequency, forms and filings

There is no federal pay frequency rule; states set the minimum. Exempt (salaried) staff can often be paid less frequently than hourly, nonexempt staff. Most U.S. employers pay every two weeks (26 pay dates) or twice a month (24).

New York's manual worker rule deserves attention: courts disagreed for years on whether paying warehouse or technician staff bi-weekly created liquidated damages, and a 2025 amendment limited damages for a first violation, but the weekly rule itself remains. Rules on final pay after termination differ sharply by state (California requires it immediately on termination); see Terminations and exits.

Onboarding forms

• Form W-4: federal withholding elections. There are no allowances since the 2020 redesign. Many states use their own form (NY IT-2104, CA DE 4, IL-W-4, NJ-W4).
• Form I-9: employment eligibility, within three business days of the start date (see Hiring).
• New hire report: to the state within 20 days under federal law; some states require it sooner.

Filing calendar

The 2025 federal tax law and your W-2s

The 2025 federal budget law (the "One Big Beautiful Bill Act") created two temporary income tax deductions for tax years 2025 to 2028. Employees in listed tipped occupations can deduct up to $25,000 of qualified tips, and nonexempt employees can deduct up to $12,500 ($25,000 for joint filers) of qualified overtime, meaning only the premium portion required by the Fair Labor Standards Act (the "half" in time-and-a-half). Both phase out above $150,000 of modified adjusted gross income ($300,000 joint). These are deductions on the employee's return: you still withhold income tax and pay FICA on tips and overtime as before.

What changes for employers is reporting. For 2025, the IRS gave transition relief and allowed voluntary reporting (for example, in box 14). For 2026 the final Form W-2 adds box 12 code TT for qualified overtime compensation, code TP for tips with a new box 14b for the Treasury tipped occupation code, and code TA for employer contributions to the new "Trump accounts" for children. Payroll systems must track the FLSA overtime premium separately from any contractual overtime above the legal minimum. The same law raised the Form 1099-NEC and 1099-MISC reporting threshold from $600 to $2,000 for payments made after 2025.

Contractor or employee?

Italian companies often start in the U.S. by engaging a "consultant" on a 1099 basis. That can be legitimate, but misclassification is one of the most expensive payroll errors: back FICA and FUTA, state unemployment, penalties, unpaid overtime and benefits claims. There is no single test; the IRS, the Department of Labor and each state apply their own.

The IRS common-law test

The IRS looks at behavioral control (do you direct how the work is done?), financial control (does the worker invest, bear expenses, serve other clients, and have a chance of profit or loss?) and the relationship (written contract, benefits, permanence, whether the work is a key activity of the business). Either party can ask the IRS for a determination on Form SS-8. The Voluntary Classification Settlement Program lets businesses reclassify workers prospectively with reduced back taxes.

The Department of Labor: a shifting standard

• 2024 rule: effective March 11, 2024, a six-factor "totality of the circumstances" economic reality test that made contractor status harder to establish under the FLSA.
• 2025 enforcement stance: in May 2025 the DOL announced it would no longer apply the 2024 rule in its own investigations, relying instead on its older 2008 guidance and the 2019 opinion letter approach. The 2024 rule nonetheless remained on the books and can still be cited in private lawsuits.
• February 2026 proposed rule: published February 27, 2026 with comments closing April 28, 2026, it would rescind the 2024 rule and return to a "core factors" test in which control over the work and the opportunity for profit or loss carry the most weight. As of September 2026 it is not final; courts also give agency interpretations less deference after the Supreme Court's 2024 Loper Bright decision.

The ABC test in California, New Jersey and Massachusetts

These states presume a worker is an employee unless the business proves all three prongs: (A) the worker is free from control; (B) the work is outside the usual course of the hiring company's business; and (C) the worker is customarily engaged in an independently established trade or business. Prong B is the killer: a software company cannot usually treat a freelance developer as a contractor. California codified the test in AB 5 (Labor Code 2775 onward) with exemptions for some professionals and bona fide business-to-business arrangements. Massachusetts applies it strictly for wage laws. New Jersey applies it for unemployment and wage laws and has been pursuing aggressive enforcement.

Form 1099-NEC

If you pay a U.S. contractor (not a corporation, in most cases) $2,000 or more in 2026 for services, you issue Form 1099-NEC by January 31. Collect Form W-9 before the first payment; without a valid taxpayer ID you must apply 24% backup withholding. Foreign contractors working outside the U.S. provide Form W-8BEN instead and are generally not subject to 1099 reporting.

Expenses, accountable plans and car allowances

Business expense reimbursements are tax-free only if paid under an accountable plan, which has three conditions: the expense has a business connection; the employee substantiates it (amount, date, place, business purpose) within a reasonable time, which the IRS safe harbor sets at 60 days; and any excess advance is returned, safe harbor 120 days. Payments that fail any condition are treated as wages, subject to withholding and FICA.

Car allowances

• Flat car allowance (for example $600 a month): simple, but taxable wages in full because there is no substantiation.
• Cents-per-mile reimbursement with a mileage log: tax-free up to the IRS standard rate. For 2026 the IRS set 72.5 cents per mile, then raised it to 76 cents from July 1, 2026 because of fuel costs.
• FAVR (fixed and variable rate) plans: a hybrid that reimburses fixed costs and per-mile costs tax-free, subject to IRS conditions; common for field sales teams.
• Company car: personal use is a taxable fringe benefit that must be valued and added to the W-2.

State reimbursement mandates

Some states require employers to reimburse necessary business expenses, whatever your policy says. California Labor Code 2802 is the broadest: it covers reasonable cell phone and home internet costs for remote staff and mileage. Illinois (since 2019), Iowa, Minnesota, New Hampshire, North Dakota, South Dakota and the District of Columbia have their own versions. A written remote-work stipend policy is the simplest way to comply.

Payroll providers and what they cost

Almost no foreign-owned U.S. subsidiary runs payroll in-house. The choice is between payroll software (you are the employer and own compliance, the software files taxes), a PEO (Professional Employer Organization: co-employment, the PEO files taxes under its own accounts and gives access to its group health plans), and an EOR (Employer of Record: the provider is the legal employer, useful before you have a U.S. entity). Prices below are published or commonly quoted list prices as of 2026; enterprise quotes differ.

How to choose

• No U.S. entity, 1 to 5 hires: an EOR is fastest. Per-employee costs stay high, though, so plan a switch once you have an entity and several staff.
• Entity, under 50 employees: a PEO often pays for itself through better health insurance rates and outsourced compliance, and it can absorb SUTA registration in many states.
• Entity, 50+ employees or complex structure: payroll software plus your own benefits broker usually gives the best cost and control.

Practical guides

Frequently asked questions