Hiring in the U.S: Co-Employment vs. Setting up an Entity

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In the 2015 Doing Business Report from World Bank Group, the United States ranked in the top ten countries worldwide for ease of doing business. Additionally, Towers Watson research states that nearly 50 percent of employers globally are increasing their hiring activity. This presents plenty of opportunity for expansion, and the U.S. offers an attractive target. With less complex employment regulations than many other countries and a highly educated population, many employers leap at the chance to enter the U.S. hiring market. One of the biggest decisions for employers is whether to hire workers by setting up an entity and finding a payroll provider or by using a co-employment model to hire and manage employees.

Pros and Cons of Co-employment in the United States

Co-employment through the use of a Professional Employer Organization (PEO) is a common arrangement within the U.S., with about 15 percent of employers with 10 to 99 employees leveraging this option. In this setup, employees are hired jointly by the employer and the third party organization. The third party takes on the reporting, payroll, and other compliance requirements, freeing the employer to focus on other priorities.

The biggest drawback of co-employment is the cost. The average annual gross profit per worksite employee is over $1,200, according to the National Association of PEOs, which may be more than some companies can afford. One other less tangible issue is identity. Workers that are employed by a PEO may require additional communication and effort in order to feel like “part of the team,” which isn’t always the case for those hired in a more traditional manner.

The key benefit of using a PEO for co-employment is reduced risk. Employers entering the U.S. market for the first time have numerous hoops to jump through in terms of compliance, and having a knowledgeable local expert in place who has gone through a global payroll management certification program can help to reduce or even eliminate the majority of the risks associated with hiring new employees. If the employment arrangement is for a shorter period of time, such as a six-month contract, it would be easier to pursue a PEO relationship than try to go the alternate route of setting up a local entity.

Pros and Cons of Entity Setup and Running Payroll in the United States

Setting up an entity in the United States is the standard employment arrangement in the country. The pros of setting up an entity include greater control over the process of paying, onboarding, and selecting employee benefit options. In addition, running payroll in-house can eliminate much of the cost of administration, and it works out to the benefit of the employer for longer-term assignments, when the cost can be amortized over a longer period of time.

However, it’s very common to use an outside payroll provider to help ensure compliance. While there is a cost associated with global outsourcing payroll, it is typically less than the cost of of using a PEO to manage and outsource all hiring and management functions.

One of the downsides of attempting to manage this is the complexity of hiring and managing workers in the U.S. Below, you will find some of the key requirements to be aware of when hiring in the United States.

Key Considerations for Employing U.S. Workers

Employers must set up an entity in order to run payroll. Entities are set up by state, not at a federal level. While employers can obtain an Employer Identification Number (EIN) from the IRS, the actual entity setup must be done at a state level. For instance, the list of requirements associated with setting up an entity in Arizona include items such as:

  • Choosing a business name
  • Choosing an entity type (corporation, limited liability corporation, etc.)
  • Contacting the state Department of Revenue to pay business taxes
  • Registering with the local city or county for any applicable local taxes or licensing requirements
  • Securing a federal EIN
  • Establishing a business bank account

This is a typical setup process for most states, though each one may vary to some degree. It’s important to note that there are localized regulations not only at a state level, such as California, but at municipal levels as well. For instance, the state of Pennsylvania has nearly 3,000 local tax jurisdictions. Good global payroll providers will be aware of these nuances and can help to navigate the tricky patchwork of local tax laws whether you are hiring in New York, Texas or Massachusetts

Nearly every state requires both federal and state taxes to be withheld on employees. In addition, federal taxes such as Medicare and social security (FICA) must be paid to the government on a monthly or semi-weekly basis. Another relevant tax that is paid throughout the year based on payroll is FUTA, or federal unemployment taxes.

Finally, any medical insurance or other benefits to be offered must be clearly spelled out by the employer. After the adoption of the Patient Protection and Affordable Care Act in recent years, employers now have a federal requirement to offer affordable healthcare options to their workers, with varying compliance requirements based on employer size. The area of benefits can be complex, from managing annual 401(k) nondiscrimination testing to ensuring that deadlines for reporting and sharing summary plan descriptions are met. Many small employers use outside help to manage these requirements, at least initially, due to the potential risks associated with any missteps.

While it’s clear that there are many requirements and decisions associated with setting up an entity in the U.S., it’s also clear that employers have more control over their hiring, payment, and benefits decisions than with a PEO arrangement. Employers should also note that while every attempt has been made to link to updated, relevant sources, laws can change from year to year and it’s always best to ascertain the most current regulations in order to make any employment decisions.