When placing candidates across international markets, understanding the local tax landscape is just as important as knowing the salary benchmarks. For recruitment firms operating in both the UK and the US, being able to clearly explain how take-home pay, deductions, and filing obligations differ can significantly impact compensation and candidate’s decision. Here is what you need to know.  

Income Tax  

One of the biggest differences is the structure. One of the main challenges in the US is the need to understand how federal-level and state-level regulations affect the process. 

On a federal level, income tax is progressive, meaning that it is imposed at different rates depending on an employee’s earnings, with higher rates applicable to earnings above certain thresholds. Federal income tax is withheld at source by payroll, businesses are required to file federal tax returns with the Internal Revenue Service quarterly via Form 941. The tax year runs from January 1 to December 31.  

Additionally, most US states impose their own income taxes on earnings at different rates and these must be integrated into payroll alongside government taxes.  

Income tax in the UK is also imposed progressively and has different tax rates depending on different levels of employee salary. Income tax is withheld at source and collected on a Pay As You Earn (PAYE) basis. It is reported to the HM Revenue and Customs monthly and as a full payment submission. Unlike in the US, the tax year runs from 6th April to 5th April the following year. 

Social Security vs. National Insurance 

Both the US and UK have mandatory social security contributions to fund social programs. In the US, this is known as Social Security and Medicare taxes, and funds retirement benefits and healthcare. The UK has its National Insurance system, contributing towards the National Health Service and state pensions.  

The UK’s social insurance tax requires employees to make National Insurance contributions (NIC) from their earnings and deducted at source like income tax. Employees pay Class 1 national insurance contributions of 8% on earnings above the £242 per week primary threshold. You will only pay contributions of 2% on any earnings over £967 per week.  

Self-employed individuals pay different types of NICs, a weekly flat rate Class 2, and Class 4 based on the level of their profits. These are calculated during their self-assessment tax bill submitted annually also to the HMRC. There is a third type, Class 3 also knows as voluntary contributions. 

In the US, Social Security is taxed up to $168,600; with no cap on Medicare. Similarly to the UK, it is taxed and paid differently for self-employed individuals.  

Tax Filing

One of the main differences between the two countries, is that in the UK most employees aren’t required to do any tax filing as their tax is handled via PAYE. Filing is only required for the self-employed, high earners and those with complex income, while almost everyone files a return in the US even regular employees (W-2).

Key Payroll Legislation 

The primary piece of payroll tax legislation in the US is the Federal Income Contributions Act (FICA) which requires employers to withhold payroll taxes that fund Social Security and Medicare. While individual states may have their own regulations, there are also several key federal laws that US businesses must consider when managing payroll, including: 

• The Fair Labor Standards Act: Establishes a federal minimum wage and overtime pay.  
• The Civil Rights Act: Prohibits discrimination in the payment of wages on the grounds of race.  
• The Equal Pay Act: Prohibits discrimination in the payment of wages on the grounds of sex.  
• The Americans With Disabilities Act: Prohibits discrimination in the payment of wages on the grounds of disability.  
• The Family Medical Leave Act: Provides an entitlement for employees to take unpaid, protected leave per year for family or medical reasons. 

The UK’s main payroll legislation is the Employment Rights Act, which was implemented to ensure that employees receive fair treatment in the workplace, including protection from unfair dismissal. Other UK laws relevant to payroll include:  

• National Minimum Wage Act: Establishes the minimum wage for workers across the UK.  
• Part-Time Workers (Prevention of Less Favourable Treatment) Regulations and Agency Workers Regulations: Protects part-time workers from pay discrimination.  
• Income Tax (Earnings and Pension) Act: Sets out progressive income tax rates against employee earnings.  
• National Insurance Contributions Act: Sets out rules for making contributions to the UK’s National Insurance.  
• Pensions Act: Sets out the rules for auto-enrolling UK employees in a pension fund. 

Tax regulations can vary not just at the federal level, but also by state, city, and even municipality. Always check local requirements or consult a tax professional when placing candidates in different locations. 

An experienced Employer of Record partner can provide full legal guidance while ensuring compliance with federal and state labor laws.