When you get a job offer in the U.S., you will generally get an offer letter that specifies your salary and the benefits that you will receive as an employee.
Unlike other countries where, in addition to the salary, the CTC (Cost To Company) is mentioned—in which the company lists the monetary value of all the benefits provided to the new employee to show a much bigger offer package—that is not done in the U.S. Even though most companies provide numerous benefits, you don’t need to worry about what it would cost the company to provide them, as it does not affect you in any manner from tax or other financial perspectives.
Salary is either mentioned as an annual salary or an hourly salary.
For example, you would be paid $80,000/year, or you would be paid $40/hour.
The salary is paid either every two weeks or every 15 days. Some companies may pay on the 1st and the 15th of every month, or the 15th and the 30th of each month. Some companies may pay the salary every week, but it is extremely rare for any company to pay salary on a monthly basis.
If the company says your salary is $80,000/year, that is your gross salary. Your net salary (in-hand salary) would be reduced by taxes and other authorized deductions.
E.g., if your salary is $80,000/year, and you are getting paid every two weeks, your gross salary per paycheck would be $80,000/26 = $3,076.92
From your gross salary, you will have to pay income taxes and payroll taxes.
- Federal income tax
The exact tax rate depends upon your income and whether you are single, married filing jointly, married filing separately, head of the household, etc. It also depends upon the number of dependents you have, such as your spouse and/or minor children.
Such deductions are determined when you fill out the IRS Form W-4.
- State income tax
While most states have state income tax, some such as Texas and Washington have no state income tax.
- Local tax
In addition to federal and state income tax, in some places (i.e., New York City), you would have to pay local taxes such as a county tax or city tax. That is an additional income tax.
- Payroll tax
Payroll tax consists of social security and Medicare tax.
The social security tax is 6.2% of your gross salary. Medicare tax is 1.45% of your gross salary. In other words, your payroll tax (also called FICA tax) is 7.65%.
While the Medicare tax applies to the entirety of your wages, the social security tax is applicable only up to a certain amount. For example, in 2020, the salary limit is $137,700. This limit keeps going up every year.
None of the above taxes are mentioned in your offer letter.
In addition to taxes on the employee, your employer also has to pay certain taxes, but those are not mentioned anywhere in the offer letter, either. The most common taxes are as follows:
- Payroll tax
Just like an employee paying the payroll taxes as described above, the employer would also have to pay the same amount in payroll taxes from the employer’s account.
- State unemployment tax
The exact rate of tax depends upon the state, the unemployment situation at any given time, as well as whether the state government had to pay any unemployment benefits to former employees.
Usually, this tax is only for a certain amount of salary per year, such as the first $9,000 of salary in Texas in 2020.
- Federal unemployment tax
Just like the state unemployment tax, the employer would have to pay federal unemployment tax.
None of the employer taxes are mentioned anywhere in the offer letter, and that is not a matter of concern to the employee.
From your net salary, there may be further deductions as authorized by you (or by court order, etc.). The most common deductions are:
- Health Insurance
The majority of employers provide health insurance to their employees. However, they don’t pay 100% toward the employee’s health insurance.
In most states, employers are required to pay only 50% of the health insurance premium for the employee. They can choose to pay more. Most employers may not pay for health insurance for the employee’s dependents, and that would entirely be your responsibility. Of course, many employers choose to pay a certain amount of the premium for dependents, as well. In any case, that is entirely up to the employer to provide more benefits.
- Retirement Funds
If your employer provides the facility for you to save for retirement, you can participate in that. It is called a 401(k) in the U.S. There may be a certain waiting period with most employers.
You can choose to put aside a certain amount, usually specified either as a flat amount per paycheck or percentage of the salary. You can decline to put aside any money, if you choose to. The maximum contribution limit in 2020 for a 401(k) is $19,500. These contributions are called deferrals and taken out of your gross salary, that is, before taxes.
If you are obligated to pay for child support or your student loans and you have not been doing so, the government may send a court order to your employer to deduct a certain amount out of your paycheck and submit it to a government agency or to whomever you owe money. This is known as “garnishing wages”.
If you authorize any money to be deducted from your paycheck for services such as subsidized lunch, parking, a discounted gym membership, etc., these will be subtracted, as well.
None of the deductions listed above are mentioned in your job offer letter.
In addition to the salary, your employer may provide certain employment benefits to you. Exact benefits vary by company, but the most common ones are:
- Health insurance
Described above in the deductions section.
- Sick leave
Your employer may provide a certain number of paid sick days per year, e.g., 6 paid sick days per year.
Usually, if you don’t get sick and you don’t use them, they will get reset in the new year.
The exact policy may vary by the employer. Some employers allow you to use sick leave only if you get sick. Others extend it to your spouse and minor children. Some employers may allow any family member and pets. Some employers, though rarely, may have no restrictions, and you can use it even if your cousin’s mother-in-law’s neighbor’s dog is sick.
- Vacation leave
Your employer may provide a certain number of paid vacation days per year, e.g., 10 paid vacation days per year.
Usually, if you don’t use them, you can either roll over a certain number of vacation hours to the next year or cash them out. The exact policy varies by the employer.
Generally, vacation days are taken in increments of full days (8 hours of vacation time = 1 vacation day). You can’t say that you would like to take vacation for 3 days, 2 hours, and 26 minutes. Some companies may allow you to take vacation time in half-day increments.
- Other paid leave
Your employer may provide other paid leave opportunities such as for jury duty or bereavement (if a close family member passes away).
- Paid Time Off (PTO)
Some employers don’t distinguish between vacation days, sick days, or other types of leave, and they simply give you a certain amount of paid time off for whatever reason—e.g., 15 PTO days per year.
Employers will usually provide a paid day off for certain major holidays. The paid holidays can vary by employer and, sometimes, by state.
Most major holidays are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving, and Christmas Day.
Some employers may offer additional holidays such as Veterans Day, Columbus Day, Martin Luther King Jr. Day, Presidents’ Day, etc.
If a given holiday falls on a weekend, many employers would designate a different working day as a holiday, but not all do.
Many employers provide an opportunity for you to save for retirement. Your contribution is described in the “Deductions” section above.
Additionally, the employer may contribute certain amounts from their account toward your retirement. It can either be a guaranteed amount, such as 3%, or they would match your contribution up to a certain percentage, such as 5%. There can be other variations, and it really depends upon the employer.
Some employers have a scheme of safe harbor and profit sharing, where they would contribute a minimum of 3% to your 401(k) even if you don’t contribute anything. Additionally, they would contribute a varying amount, and it is called profit sharing. While safe harbor contribution has immediate vesting, profit sharing may have 6 years vesting. In other words, if you leave the employer too soon, you can take the safe harbor portion with you, but for-profit sharing, it may have a tiered schedule such as 0%, 20%, 40%, 60%, 80%, or 100%, depending upon how long you have been with the company.
- Life Insurance and Disability Insurance
Certain employers, especially the larger ones, may provide other forms of insurance such as term life insurance or disability insurance.
- Other Benefits
The exact benefits may vary by the employer, but they could include a gym membership, discounted or free lunch, parking fee assistance, commute pass assistance, higher education assistance, and so on.
Even though the usual benefits are listed in the job offer or accompanying document, the monetary value or any costs associated with them are not mentioned anywhere, as they don’t directly matter to the employee.
In some countries, in addition to basic salary, there are certain allowances that are separately mentioned, such as:
- Dearness Allowance (DA)
- Leave Travel Allowance (LTA)
- Medical Allowance
- Conveyance Allowance
- House Rent Allowance (HRA)
- Vehicle Allowance
- Telephone Allowance
While it is not completely impossible for a company in the U.S. to offer any of the above allowances, they are not heard of by most people and are extremely rare. Practically speaking, they don’t exist.
In reality, providing such allowance is just another way of splitting your salary into different allowances, and many of the allowances have no value to you if you don’t use them.
Compared to that, providing the entire amount of compensation as a straight salary is much better, and you can use your money as you like (after taxes and deductions, of course). It’s much cleaner and simpler—once you get your salary, use it however you like. Stay where you want, commute as you want, travel as you want, and so on.
A U.S. job offer letter includes the salary. It additionally mentions any bonuses (if any) and a list of benefits, but no monetary values associated with them are mentioned, as it does not directly matter to you.
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