The Complete Guide To Texas Payroll Taxes
Learn how payroll taxes in Texas are calculated and exactly which payroll tax and labor laws your Texas-based business needs to follow.
It can be tough trying to calculate payroll for your small business in Texas by yourself, but you’ll be happy to know that while everything in Texas is big, its number of required payroll taxes is quite the opposite. Texas payroll taxes are relatively simple, and we’re here to make understanding payroll tax and labor laws in Texas even easier.
Read on to learn everything you need to know when you file and submit payroll in Texas as a small business owner.
Table of Contents
Federal & State Payroll Taxes In Texas
Payroll tax laws in Texas are unique in that they only require one tax from employers at the state level: unemployment insurance (UI). Employers, including small business owners, don’t need to report state income tax on behalf of their employees and don’t need to worry about reporting employee income taxes at the local level, either.
In short, the Lone Star State has some of the leanest payroll tax regulations in the country. These regulations reduce taxable income that employees need to pay and can make Texas an attractive state in which to work. While this impression largely holds true, payroll management in Texas also includes taxes at the federal level that apply to all individuals who run a business in the state.
Here is a full list of the federal and state payroll taxes you’ll need to take into consideration when doing payroll in Texas. Drill down to see the details of each payroll tax to learn how it will affect your business.
Texas Payroll Tax Exclusions & Exemptions
It’s possible to claim tax breaks on Texas properties to which you’re legally entitled. Under Texas law, school districts are required to contribute a $25,000 exemption on all residence homesteads, giving counties the option to provide their own exemption for residence homesteads of up to 20% of the homestead’s appraised value.
Veterans and their families can enjoy comprehensive exemption provisions in Texas. Disabled veterans may be eligible for a $12,000 exemption depending on their age and severity of their disability, while their surviving spouses may be entitled to the same exemption as the veteran at the time of his or her death.
Senior and disabled citizens in Texas are also eligible for tax breaks and may qualify for a $10,000 exemption from school taxes. Citizens who are disabled or over the age of 65 may be eligible for an even larger exemption from school taxes in certain taxing districts.
Texas Labor Laws & Other HR Requirements
Not only do small businesses need to worry about Texas payroll taxes, they also need to be compliant with Texas labor laws.
Labor laws in Texas cover areas such as employment discrimination, child labor, overtime, minimum wage, and more. Employers must understand how to comply with the Texas Child Labor Law, the Texas Payday Law, and the state’s minimum wage and overtime laws.
Here is a complete list of the Texas labor and HR laws that your Texan business should know. Drill down into each to learn exactly how to keep your business compliant.
How To Calculate Payroll Taxes In Texas
You now have a solid understanding of the tax terms you need to pay attention to when you process payroll as well as certain legalities and calculations that go into submitting accurate payroll taxes. With a firmer grasp on what you need to set up and run your own payroll system, it’s time to think about the factors that make payroll processing tools and functionalities stand out from the competition.
Let’s take a look at the various payroll tools and resources available to business owners who need to simplify the process of running their own payroll:
Step 1: Make Sure You’re Following Texas Payroll Laws
We recommend referring to the first section of this article for existing payroll laws in Texas. To quickly summarize, Texas boasts a lean set of payroll tax requirements that are relatively easy to comply with when reporting payroll taxes. Business owners need to do their due diligence and comply with Texas’ payroll laws to a tee, especially considering that they don’t need to worry about state income taxes.
Texas may be a big state, but its list of payroll taxes is quite small. Texas’ single state-level payroll tax is for unemployment insurance, which is the responsibility of the employer along with federal unemployment and income taxes as well as Additional Medicare tax.
Step 2: Gather Employee Documentation
Employee documentation is your key to entering information in the correct columns on an employee’s slot in your payroll management system. You need to have the proper employee documentation after you research payroll tax laws in Texas including your W-4 form, W-2 form, and I-9 form.
- W-4 Form: W-4s Provide business owners with details they need to calculate the amount to withhold from employee wages for contributions to Texas federal income tax. Remind your employees that they must update their W-4 to reflect recent life changes relevant to taxation.
- I-9 Form: I-9s are required for employers to verify that their employees are legally able to work in the U.S. I-9s must be filled out on the first day that an employee begins employment, and employers must afterward complete their section of the I-9 within three business days.
- W-2 Form: W-2s are a wage and tax statement that the IRS requires employers to send to their employees at the end of every year. Employers need to furnish a W-2 for every employee to whom a salary or wage is paid per conditions of employment.
Step 3: Calculate Your Employee’s Pay
These days, robust payroll software can turn calculating an employee’s pay into one of the simplest parts of running payroll taxes. Payroll software can simplify things with features like timesheets, attendance systems, and digital times that let you track the working hours of multiple employees.
In general, calculating employee pay by yourself is most feasible if your business staffs only a few hourly or salaried employees. If this is the case, remember to account for any tips that your employees receive as well as their commission, PTO/sick leave, and overtime pay in addition to their standard salaries and hourly wages.
Read our complete guide on how to calculate payroll if you need additional help.
Step 4: Deduct Payroll Taxes
It’s time to calculate and deduct federal and state-level taxes from each of your employee’s wages. The most important taxes that employers in Texas need to deduct include:
- Federal Income Tax: Use your employee’s Form W-4 and their withholding selections to determine their total withholdings for federal income tax. Withholding amounts depend on factors including an employee’s earnings as well as their filing status.
- Texas Unemployment Insurance: Texas’ only state-level payroll tax covers unemployment insurance, which is paid on the first $9,000 of an employee’s earnings every year. UI rates typically fall between 0.31% and 6.31% although they change yearly, and are determined using the taxable wage base of the first $9,000 of an employee’s wages.
- FICA: Social Security tax and Medicare tax affect earnings of employees and employers. Contributions for Social Security tax are 6.2% of earnings up to $132,900. The Medicare tax rate is 1.45% of all earnings of both employees and employers.
- Additional Medicare Tax: Additional Medicare tax needs to be paid depending on the filing status of an employee. The 0.9% Additional Medicare tax is withheld from employee wages that are greater than $200,000 every year.
- Savings Account Contributions: Employers need to send their employees’ contributions to social welfare programs that range from health insurance and life insurance programs to retirement plans and 401(k)s.
Step 5: Process Payroll
You’re just about ready to distribute paychecks to your employees. After you determine your tax withholdings and the net pay for your employees, you can either process your paychecks manually or use the much faster method of direct deposits. You’ll need to take care of a one-time setup for your direct deposit system for each employee whom you’ll be paying. Although it’s possible to outsource your paycheck distribution to a third party, it’s also good practice to use your payroll software solution to automate your distribution process yourself, especially if it’s just you and a few other employees.
If you are ready to simplify your payroll process, check out these top payroll software options to save yourself time and stress on payroll. Most payroll software calculates everything for you, including payroll taxes so you can get back to running your business.
Step 6: Don’t Forget To Keep Records
It’s worth your time to create a system with which you can save relevant employee information and documentation. For example, you’d likely want to have employee information on their earnings available if they quit or are fired. Your payroll records should include details such as:
- Full name and Social Security number of employee
- Address and ZIP code
- Employee’s schedule
- Total hours worked each day by employee
- Type of pay
- Pay rate
- Overtime and other compensation
- Paycheck deductions
- Payment dates and periods
Learn how long to keep payroll records and exactly which ones to keep.
Texas Payroll Tax Resources
You now know the most important parts of implementing and managing a payroll system that’s simplified for you. It’s natural to need some time to start working through tax reporting more quickly, but it’s only a matter of time before you’re feeling confident and in control.
For more information on calculating how much your employees owe in federal income taxes in Texas, take a look at the most recent edition of the IRS Publication 15-A. If you’re interested in diving a bit deeper into running a business in Texas, consider reading about the best Texas small business loans and financing. You can also learn more about small business insurance in Texas.