U.S. Expansion Guide: Should You Use an EOR?

Foreign companies are still flocking to the US, and it’s no surprise why. In 2024, a whopping $76 billion poured into the US in just the first quarter, with big players like Canada and Germany leading the charge. Sure, tariffs and economic hiccups pose challenges, but the US has held its spot as the world’s top destination for foreign investment for 12 years running, according to Kearney’s 2024 FDI Confidence Index. With manufacturing booming and new projects popping up, the US remains a magnet for international businesses looking to grow.

The U.S. Tax System

Hiring employees in the U.S. involves navigating a complex web of federal, state, and local tax obligations that significantly impact the cost of employment for businesses, including foreign companies expanding into the U.S. These taxes fund programs like Social Security, Medicare, unemployment insurance, and local services, and failing to comply can lead to steep penalties.

Federal Payroll Taxes

At the federal level, employers must withhold and contribute to several taxes, which directly increase labor costs:

• Federal Income Tax: Employers withhold this from employee paychecks based on their Form W-4. Rates range from 10% to 37% depending on income and filing status. While employers don’t pay this tax directly, they must ensure accurate withholding and submit payments via the IRS EFTPS system. ‍
• FICA (Social Security + Medicare): Both employers and employees each pay: ‍
  
  • 6.2% for Social Security (up to $176,100 wage base in 2025) ‍
  • 1.45% for Medicare, with no cap
    Employers must also withhold an extra 0.9% Medicare tax on high earners ($200,000+). ‍
• FUTA (Federal Unemployment Tax): Employers pay 6% on the first $7,000 of wages per employee. With state tax credits, most only pay 0.6%, or $42 per employee/year. This tax is not deducted from employee pay.

Employers must file forms like Form 941 (quarterly) and Form 940 (annually) to report these taxes, and issue Form W-2 to employees by January 31 to report wages and taxes withheld. Electronic filing is required for businesses with 10 or more W-2s. Late payments or errors can trigger penalties, such as a 2% fine for a one-day-late payroll tax deposit.

State Taxes

In addition to federal taxes, U.S. employers must manage varying state tax rules — which can significantly affect hiring costs.

• State Income Tax:
  Most states (41 + Washington, D.C.) tax employee wages, with rates from 1% to 13.3% (e.g., California).
  Some states — like Texas, Florida, and Washington — have no income tax.
  Employers must withhold tax based on the employee’s work location or residence, which can get tricky with remote teams. ‍
• State Unemployment Insurance (SUI/SUTA):
  Employers fund state unemployment programs, and rates and wage bases vary widely. ‍
  
  • California: 1.5%–6.2% on first $7,000
  • New York: Up to 9.9% on first $12,300
    Rates may rise if your company has a history of layoffs. ‍
• Other State Payroll Taxes:
  Some states have extra payroll taxes for benefits like: ‍
  
  • Paid Family Leave (e.g., California, New York) ‍
  • Disability Insurance (e.g., New Jersey, Hawaii)
    These may add 0.5%–1% to your payroll costs, split with employees in some cases.

Local Taxes

While less common, some U.S. cities and counties add their own layer of payroll taxes:

• Local Income Taxes:
  Certain cities and counties — like New York City (up to 3.876%) or Maryland counties (up to 3.2%) — charge income tax on top of state and federal rates. Employers must withhold and report these where applicable. ‍
• Local Payroll Taxes:
  Some areas charge payroll or “head” taxes on employers. For example, Seattle taxes large employers (over $8.5M payroll) 0.7%–2.4% based on wages.
  These taxes increase hiring costs and require separate filings.

Additional Employment Costs

Beyond taxes, other mandatory costs inflate the price of hiring:

• Workers’ Compensation Insurance: Required in all states, this covers workplace injuries, with rates based on job risk and payroll (e.g., $0.50–$5 per $100 of payroll). Rates vary by state and insurer, adding 1%–5% to labor costs. ‍
• Benefits and Compliance: While not taxes, mandatory benefits like health insurance (often 80% employer-funded) and compliance with laws like COBRA (for post-termination health coverage) add significant costs. For foreign companies, private health insurance can make U.S. hiring as expensive as in high-tax countries like Denmark.

Contracts and Employment Terms

The U.S. operates under an “at-will” employment system in most states, meaning employers or employees can end the employment relationship at any time, for any reason (or none), without notice—unless a contract specifies otherwise. Exceptions to at-will employment include:

• Contractual Agreements: Written or oral contracts can override at-will status, specifying termination conditions or notice periods. ‍
• Statutory Protections: Federal and state laws prohibit termination based on protected characteristics (e.g., race, gender, disability) under laws like Title VII of the Civil Rights Act or the Americans with Disabilities Act. ‍
• Public Policy Exceptions: Some states prevent firings that violate public policy, like terminating an employee for whistleblowing or refusing illegal activities. ‍
• Implied Contracts: Employee handbooks or verbal promises (e.g., “you’ll have a job as long as you perform”) can create implied contracts, limiting at-will flexibility. Courts in states like California have upheld such claims.

Clear documentation and legal advice can prevent misunderstandings or lawsuits, especially since litigation risks are higher in the U.S. than in many countries.

Key elements to include in an employment agreement:

• Job Responsibilities: Outline the role, duties, and expectations to align employer and employee.  ‍
• Salary and Benefits: Detail base pay, bonuses, commission structures, and benefits like health insurance, 401(k) contributions, or stock options.  ‍
• Work Location: Specify the primary work location, especially for remote or multi-state employees, as this impacts tax and labor law compliance.  ‍
• Termination Terms: Define whether employment is at-will or subject to notice periods, severance, or cause-based termination. Include clauses for confidentiality, non-compete (where enforceable), or non-solicitation to protect business interests. ‍
• Payment Schedule: State whether pay is weekly, biweekly, or monthly, and clarify how overtime or bonuses are calculated. ‍
• Remote Work Policies: With 26% of U.S. workers fully remote in 2025 (per Pew Research), include terms for remote work, such as equipment provision or reimbursement for home office expenses, especially in states like California with strict reimbursement laws.

While written employment contracts aren’t legally required in the U.S., they’re highly recommended, particularly for foreign companies hiring internationally. Contracts provide clarity, reduce disputes, and ensure compliance with U.S. laws.

State-Specific Wage Notices

Some states mandate written wage notices at hire, detailing pay rates, schedules, and allowances. For example:

• California: Under the Wage Theft Prevention Act, employers must provide a notice at hiring (and upon changes) with details like hourly rate, overtime rate, pay frequency, and employer contact information. Non-compliance can lead to penalties up to $250 per violation. ‍
• New York: The Wage Theft Prevention Act requires a similar notice, including pay rate, pay day, and allowances (e.g., for meals or lodging). Notices must be provided in English and the employee’s primary language if over 5% of the workforce speaks it. ‍
• Other States: States like Illinois and Washington have similar requirements, often tied to minimum wage or payday laws.

Working Hours and Overtime

The Fair Labor Standards Act (FLSA) sets federal standards for working hours and overtime, but states often impose stricter rules, adding complexity for employers.

Standard Workweek

Under federal law (FLSA), a standard workweek is 40 hours over 7 days. There’s no federal cap on total hours, but all work time must be paid — including prep time or on-call hours.

• Federal minimum wage (2025): $7.25/hour
• Many states and cities have higher rates: ‍
  
  • California: $16/hour ‍
  • New York: $15.74/hour ‍
  • Seattle: $20.76/hour

Overtime Rules

• Non-Exempt Employees (e.g., hourly workers):
  Must be paid 1.5x their regular rate for any hours over 40/week.
  Example: $20/hour becomes $30/hour for overtime. ‍
• Exempt Employees (e.g., managers, professionals):
  Not eligible for overtime if they:
  
  • Perform executive/admin/professional duties
  • Earn at least $844/week (as of Jan 1, 2025)
    Some roles (e.g., doctors, lawyers) are always exempt.

Some states have stricter overtime rules than federal law. In California, overtime starts after 8 hours in a day or 40 in a week, with double pay after 12 hours in a day. New York requires overtime after 40 hours per week, but live-in care workers qualify after 44 hours. Alaska and Colorado mandate daily overtime in certain industries.

Trial Periods

Probation or trial periods (typically 30–90 days) are common in the U.S. to assess employee fit, but they’re not legally mandated or regulated under federal law.  

• No Special Status: Employees on probation are fully protected by federal and state labor laws, including minimum wage, overtime, anti-discrimination, and workers’ compensation. Unlike some countries (e.g., France), probation doesn’t reduce employee rights. ‍
• At-Will Applies: During probation, at-will employment allows termination without cause, unless a contract states otherwise. However, terminations must avoid protected characteristics to prevent discrimination claims. ‍
• Common Practices: Employers often use probation to evaluate performance, provide training, or delay benefits eligibility (e.g., health insurance or PTO). Some states, like California, allow “introductory period” clauses in contracts, but they don’t alter legal protections. ‍
• State Nuances: California’s Paid Sick Leave Law applies from day one, so probationary employees accrue sick leave immediately. New York’s WARN Act requires 90 days’ notice for mass layoffs, even for new hires, if the employer has 50+ employees.

Minimum Wage and Compensation

Federal Minimum Wage

The federal minimum wage has remained $7.25/hour since 2009. It applies to most non-exempt workers under the Fair Labor Standards Act (FLSA). However, this rate has lost value over time due to inflation — what bought you $7.25 in 2009 is worth closer to $5.50–$6.00 today.

Important exceptions:

• Tipped workers: Can be paid as little as $2.13/hour in cash wages, as long as tips bring them up to at least $7.25/hour.
• Certain agricultural or seasonal workers, and small businesses (under $500,000 revenue) may be exempt.

State Minimum Wages

Most U.S. states have set their own minimum wages above the federal level. In 2025:

• California: ~$17.00/hour (with cities like San Francisco and LA even higher) ‍
• New York: ~$16.75–$17.00/hour, depending on region ‍
• Washington, D.C.: ~$18.50/hour (among the highest nationwide) ‍
• Texas, Georgia and some Southern states: Still follow the federal minimum

Over 30 states (plus D.C.) now have higher minimums than the federal rate. Many also index wages to inflation, so expect annual increases.

In addition to state laws, many cities and counties set their own minimum wages. For example:

• Seattle: ~$20.76/hour in 2025 ‍
• New York City: Higher than the rest of the state ‍
• Los Angeles & San Francisco: Routinely exceed state minimums

Employers must follow whichever rate is highest for the location where the employee works — especially important for remote teams.

Beyond Base Pay: What Else Counts?

Hiring competitively in the U.S. often means offering more than just a wage. Consider:

• Wages above minimum: Big employers like Amazon and Walmart pay $15–$20/hour starting wage — even in low-wage states ‍
• Benefits: Health coverage, paid leave, and retirement plans are often expected, especially in high-cost regions ‍
• Gig economy: Pay for gig workers (e.g., Uber, DoorDash) is less predictable and may not fall under traditional wage laws. Some states (like California) have introduced special rules for this.

Mandatory Employee Benefits in the U.S.

The benefits listed below are required by federal or state law, depending on your company size and where the employee is located.

Social Security and Medicare (FICA)

Employers must contribute to the Federal Insurance Contributions Act (FICA), which funds:

• Social Security: 6.2% of wages (up to $168,600 in 2024) ‍
• Medicare: 1.45% of wages, with an extra 0.9% for high earners

Unemployment Insurance (UI)

UI provides temporary income for workers who lose their jobs. Employers pay:

• Federal Unemployment Tax (FUTA): 6% on the first $7,000 of wages (often reduced via state credits) ‍
• State UI tax: Varies by state and claim history

Employees usually don’t pay into UI, but eligibility depends on state rules and job history.

Workers’ Compensation

Workers’ compensation covers injuries or illnesses that occur on the job and is required in nearly every U.S. state, though the specifics vary. In California, it’s mandatory for all employees, ensuring broad coverage. In contrast, Texas allows employers to opt out of the system, but doing so significantly increases their liability risk in the event of a workplace injury.

Affordable Care Act (ACA) Compliance

Companies with 50 or more full-time employees must offer health insurance that meets ACA standards — or face penalties. Smaller employers are exempt, but many still offer coverage to stay competitive.

Family and Medical Leave Act (FMLA)

If you have 50+ employees, you must provide up to 12 weeks of unpaid, job-protected leave for:

• Birth or adoption
• Serious personal or family illness
• Military family needs

Employees must have worked 1,250 hours in the past year to qualify.

Optional (But Common) Employee Benefits

While not legally required, these benefits are widely offered in the U.S. and are key to attracting and retaining talent.

Health Insurance

Offered by about 50% of U.S. employers, with companies typically covering 50–80% of premiums. Plans vary (HMO, PPO, high-deductible with HSA). Small businesses may use ACA marketplaces like SHOP.

401(k) Retirement Plans

Tax-deferred savings plans often include employer matching (e.g., 3–6% of salary). The 2024 contribution limit is $23,000, with an extra $7,500 for those 50+. Plans must comply with ERISA and are typically managed by providers like Vanguard or Fidelity.

Paid Vacation and Sick Leave

No federal mandate, but many employers offer 10–20 vacation days and 5–10 sick days annually. Some states and cities require paid sick leave. Unlimited PTO is gaining traction but remains underused.

Parental Leave

The FMLA provides 12 weeks of unpaid leave. States like California and New York offer 6–12 weeks of paid leave. Some private employers go further, offering 4–16 weeks of fully paid parental leave.

Other Popular Perks

Dental and vision insurance, life and disability coverage, wellness programs, professional development support, remote work stipends, and employee discounts.

U.S. Work Visas

The U.S. work visa system, managed by the U.S. Citizenship and Immigration Services (USCIS) and the Department of Labor (DOL), allows non-U.S. citizens to work temporarily or permanently in the U.S. Each visa type has specific eligibility criteria, application processes, and limitations. Employers typically play a central role in sponsoring visas, though some categories allow self-petitioning.

Popular Work Visa Types

US H-1B Visa

The H-1B visa is designed for roles that require specialized knowledge and at least a bachelor’s degree, making it common in fields like technology, engineering, finance, and medicine.

• Annual cap: 65,000 regular + 20,000 for U.S. master’s degree holders (lottery-based) ‍
• Validity: 3 years, extendable to 6 ‍
• Dependents: Spouse/children get H-4 visas; some H-4 spouses can work ‍
• Process:
  
  1. Employer files a Labor Condition Application (LCA)
  2. Files Form I-129 with USCIS
  3. Wait for lottery selection (usually March–April)
     Processing can take 3–6 months (or faster with premium processing, ~$2,805)

L-1 Visa: For Intracompany Transfers

The L-1 visa allows companies to transfer employees from a foreign office to a U.S. location. It’s intended for individuals who have worked abroad for the company for at least one year within the past three years. Eligible roles include executives and managers (L-1A) or employees with specialized knowledge (L-1B).

• No cap – more predictable than H-1B ‍
• Validity: Up to 7 years (L-1A), 5 years (L-1B) ‍
• Dependents: L-2 visa; spouses can work with a permit ‍
• Process:
• File Form I-129
• Show qualifying company relationship
• Large companies can use blanket petitions for multiple employees

🇨🇦🇲🇽 TN Visa: For Canadian and Mexican Professionals

The TN visa offers a fast-track work option for eligible professionals from Canada or Mexico. It is designed for citizens of these countries who are employed in specific professions listed under the agreement, such as engineers, scientists, and accountants.

• No cap, fast processing ‍
• Validity: Up to 3 years, renewable indefinitely ‍
• Dependents: TD visa (no work authorization) ‍
• Process: ‍
  
  • Canadians: Apply directly at the U.S. border or airport ‍
  • Mexicans: Need USCIS petition (Form I-129), then visa interview

Other U.S. Work Visa Options

O-1 Visa (Extraordinary Ability)

For individuals with exceptional achievements in fields like arts, science, sports, or business. No annual cap. Valid for up to 3 years and renewable. Requires strong evidence of recognition (e.g., awards, media coverage, expert letters).

E-1 and E-2 Visas (Treaty Traders and Investors)

Available to citizens of treaty countries (e.g., UK, Japan; not available to India or China).

• E-1: For those engaged in substantial trade with the U.S. ‍
• E-2: For those making a significant investment in a U.S. business.
  Typically valid for 2–5 years and renewable.

U.S. Entity vs. EOR: What’s the Smarter Option?

Hiring in the U.S. requires deciding whether to establish your own legal entity or work with an Employer of Record (EOR). Each option has trade-offs in cost, control, and complexity — especially if you're just entering the market.

The Challenges of Setting Up a U.S. Entity

Forming a U.S. company gives you full control over hiring, payroll, and operations — but it also comes with added time, cost, and compliance.

Setting up a legal entity typically takes 1 to 4 weeks, depending on the state. While places like Delaware and Wyoming offer faster registration, others like California may take longer due to stricter regulations. After incorporation, you’ll need to maintain annual reports, file federal and state taxes, and stay compliant with changing labor laws.

Costs can also add up quickly:

• $200–$1,000 in state filing, EIN registration, and agent fees ‍
• $1,000–$5,000+ for legal and accounting help ‍
• $500–$2,000/year in recurring compliance costs, depending on state

Visa sponsorship is another factor. Most U.S. work visas — like H-1B or L-1 — require a local legal entity. This adds time and complexity for foreign companies hiring international talent.

For companies unsure about their long-term U.S. plans, incorporation may be more than they need.

Why Many Companies Use an EOR Instead

An EOR like Knit is a third-party service that acts as the legal employer for workers in the U.S. (or other countries) on behalf of a client company. The EOR handles all HR, payroll, tax, and compliance responsibilities, while the client company directs the employee’s day-to-day tasks and strategic work.

1. Hiring & Onboarding

You choose the U.S.-based candidate (e.g., citizen, green card holder, or someone with work authorization). The EOR officially hires them, manages the employment contract, and gets them set up on payroll — typically within 1–5 days.

2. Payroll & Taxes

The EOR runs payroll and handles all required tax withholdings, including:

• FICA: Social Security (6.2%) and Medicare (1.45% + 0.9% for high earners) ‍
• FUTA: Federal unemployment tax (reduced with state credits) ‍
• State taxes: Vary by location (e.g., California vs. Texas)

All taxes are filed and paid to the IRS and state agencies by the EOR.

3. Benefits & Compliance

Employees get access to the EOR’s group benefits, including:

• Health, dental, and vision insurance (often ACA-compliant)
• 401(k) plans, paid time off, and sick/parental leave (where required)

The EOR also provides workers’ compensation and ensures compliance with federal and state labor laws (e.g., FLSA, FMLA, I-9 verification).

4. Cost to You

You pay:

• The employee’s salary and benefits
• A service fee — typically $50–$500/month per employee or 5–15% of payroll

This fee covers payroll, tax filings, compliance, and benefit administration.

Using an Employer of Record (EOR) offers several advantages for international companies looking to hire in the U.S. without establishing a local entity. It allows businesses to hire employees quickly and compliantly, bypassing the need to register a U.S. company or navigate complex legal and tax requirements. This approach helps avoid significant upfront setup and ongoing compliance costs. It’s an ideal solution for companies building small teams, hiring remote workers, or testing the U.S. market with short-term or project-based roles.