Your Quick Guide To Texas Payroll Taxes, Laws & Regulations
It can be tough trying to calculate payroll for your small business in Texas by yourself, especially when you’re new to doing business in the state. If you’re still trying to learn how to withhold and pay taxes when you report payroll, then you’re in the right place. You’ll be happy to know that while Texas is indeed a large state, its number of required payroll taxes is quite the opposite.
With that in mind, it’s still important that you comply with Texas laws and regulations regarding payroll taxes so that your business can continue its operations uninterrupted. Read on to learn everything you need to know when you file and submit payroll in Texas as a small business owner for the first time.
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State Of Texas Payroll Laws & Regulations
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.
Don’t get lost in the world of Texas payroll and the long-winded calculations you still need to tackle. Refer to the following glossary of quick tax terms to guide yourself toward a flawless report of payroll withholdings and payments:
Payroll Taxes In Texas
Owning a small business in Texas means enjoying meaningful tax incentives and a relatively short list of payroll taxes to contend with. The most important terms to know when doing your payroll taxes in Texas include:
- Income Tax: The first of two federal payroll taxes that employees in Texas need to pay are federal income taxes. Your employees must withhold an amount for their income tax depending on their withholding selections in the IRS Form W-4. As of 2021, income taxes at the federal level can be in the range of 0%-37%.
- Additional Medicare Tax: The Additional Medicare tax is the second federal-level tax that employees are responsible for paying. Business owners in Texas are required to withhold the 0.9% Additional Medicare Tax from employees who meet a certain filing status as well as from wages that are greater than $200,000 annually.
- Unemployment Insurance (UI) Tax: Employers are required to pay UI tax on the first $9,000 of their employees’ annual wages. The exact rate that UI taxes use changes every year and is based on five components: General Tax Rate (GTR), Replenishment Tax Rate (RTR), Obligation Assessment Rate (OA), Deficit Tax Rate (DTR), and Employment Training Investment Assessment (ETIA). UI rates typically fall between 0.31% and 6.31% and are determined using the taxable wage base of your employees’ first $9,000 in wages annually.
- Property Tax: Texas doesn’t use its comptroller’s office to collect property taxes or set property tax rates at the state level. Local units in Texas that are set up to collect property taxes can put tax revenue toward services that support schools, municipalities, and local policing and firefighting.
- Federal Insurance Contributions Act (FICA) Tax: Small business owners and their employees are both required to pay taxes for the Federal Insurance Contributions Act (FICA), which supports Social Security taxes and Medicare taxes. Businesses and their employees in Texas pay 6.2% of all earnings that don’t exceed $132,900 for Social Security taxes; the rate for Medicare taxes is 1.45% of both an employer’s and employee’s total earnings in a year. Rates change annually per direction from the IRS and are worth regularly monitoring even as you get more comfortable with reporting Texas payroll taxes.
- Estate Tax: Texas is one of 38 states in the U.S. to not levy an estate or inheritance tax on its residents. Neither the state nor local governments in Texas partake of any proceeds from willed or inherited property.
- Sales & Use Taxes: No small business owner can start running their own payroll taxes without knowing their state’s rates for sales and use taxes. The rate in Texas is currently 6.25% at the state level, although cities, counties, districts, and other local taxing jurisdictions can impose their own additional rate of 2% for a combined total sales use tax rate of 8.25%. Businesses in Texas must collect sales and use taxes at both the state and local levels and should refer to their specific area’s information on local sales and use tax rates.
The above terms are all different types of taxes that small business owners should bear in mind when processing payroll in Texas, and there a few other federal taxes that employers are responsible for paying.
Employers must contribute 6% of the first $7,000 of their employees’ annual earnings toward the federal unemployment tax (FUTA). FUTA encourages business owners to see if they qualify for a federal tax credit to contribute toward FUTA. Federal tax credits are 5.4% and since most employers are usually eligible for them, the FUTA rate often becomes 0.6% of the first $7,000 of an employee’s yearly wages.
Business owners also need to consider court-ordered wage garnishments, child support payments, and employee contributions to accounts whenever applicable. Employers in Texas must deduct the proper amounts from their employees’ paychecks and submit them to the appropriate authorities on time.
Texas 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 Minimum Wage
Texas uses the federal minimum wage rate of $7.25 which it adopted in 2009, and there doesn’t seem to be an indication of a minimum increase happening any time soon. Employers should use a minimum wage of $2.13 for tipped employees together with a maximum tip credit of $5.12. Employers can, at their discretion and under certain restrictions, count tips as well as the value of meals and lodging toward their minimum wage.
To educate employees on labor law topics like the minimum wage, anybody who operates a business in Texas is required to display a poster that contains information on the Worker’s Compensation Program, the Uniformed Services Employment and Reemployment Rights Act, the Fair Labor Standards Act, the Employee Polygraph Protection Act, and the Occupational Safety and Health Act. Businesses in Texas typically need to print and post the Department of Labor’s mandatory posters in addition to their state posters.
Texas UI tax, sometimes called reemployment tax, provides for the adequate funding of benefit payments and the solvency of Texas’ Unemployment Compensation Trust Fund. Reemployment tax in Texas has a minimum tax rate of 0.31 percent and a maximum rate of 6.31 percent. Employers need to pay Texas UI tax on the first $9,000 that each of their employees makes in a single calendar year.
Employers also need to pay reemployment tax at the federal level through FUTA contributions. Business owners in Texas pay federal reemployment taxes with a chance for eligibility for tax breaks of up to 5.4 percent in the form of a federal tax credit.
New Hire Reporting
Both federal, as well as Texas state law, require that business owners submit their new hire information to the Employer New Hire Reporting Operations Center in the Texas Office of the Attorney General. Employers report information about their new hires to the Center within 20 calendar days after the hire date, as mandated by federal law under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.
If you’re unfamiliar with reporting any new hire information whatsoever in either Texas or any other U.S. state, remember that if you have an employee who is required to complete a W-4 form, chances are good that you need to report their new hire information. Employers who renege on their new hire reporting duties face a penalty of $25 for every occurrence in which they don’t furnish a new hire report. Penalties of up to $500 are possible for employers who are guilty of conspiring with employees to purposefully file a false or incomplete new hire report.
Texas PTO Policy
Employers in Texas are free to adopt policies or contracts that establish vacation time at an amount of their choosing. Basically, employers aren’t legally required to offer any company-wide PTO policies, and any vacation or PTO policy that they do establish must adhere to the Texas Labor Code. Business owners may rely on a “use it or lose it” basis to both simplify their PTO tracking in their payroll management software and cap time-off accruals to discourage rollovers that may exceed an accrual cap.
It’s not uncommon for employers and especially small business owners with just one or two employees to offer PTO for several “unofficial” reasons, which typically include things like holiday time and jury duty as well as leave for voting and bereavement. Employers don’t need to offer PTO for reasons such as these, although it’s fairly standard practice for businesses to determine at least some circumstances under which their employees may be paid for hours not worked.
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.
Texas doesn’t use labor laws relating to the payment of overtime. Federal overtime laws do apply in Texas, though, and they set overtime at 1.5 the regular pay rate for an employee. The Fair Labor Standards Act (FLSA) requires that employers in Texas pay overtime to employees who work beyond their standard 40-hour workweek
Texas does not have labor laws pertaining to meals and breaks or severance pay either, and the federal government does not require that the state provide them. Employers in Texas who do provide breaks must still pay employees if lunch breaks last fewer than 20 minutes, and employers who provide severance pay must adhere to terms established in either their company policy or in the applicable employment contract.
Texas uses child labor laws to restrict employment options for minors. Laws on child labor in Texas mandate that workers who are under the age of 16 years be subject to restrictions on work hours and require that minors work fewer hours while school is in session.
Child Labor Laws In Texas
Child labor laws in Texas apply to any employee younger than 18 years, and they make it illegal to employ anyone who is under the age of 14 unless specific circumstances are in place. The Texas Child Labor Law grants general exemptions to hours worked for children who are working in non-hazardous casual employment; 11 years or older delivering newspapers; 16 years or older publically selling newspapers; taking part in school-supervised work-study programs; employed through a county-supervised rehabilitation program; or employed in agriculture and outside of normal school months.
Hours of legal employment for child employees vary based on age ranges. Children aged between 16 and 17, for example, don’t need to contend with restrictions on the hours or times of day that they can work. Children who are between 14 and 15, on the other hand, can’t work for longer than 8 hours in one day and for no more than 48 hours in one week. Per the federal Fair Labor Standards Act, employees aged between 14 and 15 years may not work during school hours and only up to 18 hours in one week while school is in session.
The Texas Payday Law, previously the Texas Payment of Wages Act, details payment obligations that employers must adhere to when paying their employees throughout a calendar year. The law applies only to public employers and not private employers or independent contractors, and it defines how those public employers can release wages to their employees. Wages, as defined by the Texas Payday Law, include payments issued for PTO or sick leave as well as for severance and even parental leave pay.
Payment obligations in Texas require that employers pay any employee who is defined as an executive, administrative, or professional employee under the FLSA at least once a month. The law requires that all other types of employees be paid twice monthly and, unless an employer stipulates otherwise, that paydays fall on the first and fifteenth day of every month. Per the Texas Payday Law, employers can only use electronic transfers, checks, or cash to pay their employees on paydays, unless an employee agrees to an alternative form of payment in writing.
In addition to paying employees in adherence with the Texas Payday Law, employers in Texas are responsible for paying garnishments on behalf of their employees. Garnishments are court orders or levies from the IRS that direct employers to withhold a certain amount from an employee’s paycheck in the interest of repaying debts.
Disability insurance falls under the purview of FICA withholding for Social Security and Medicare benefits. Employers in Texas are obligated to withhold a fixed amount from their employees’ salaries during each pay cycle.
The Social Security tax component of FICA tax requirements in Texas mandate that employers and their employees contribute 6.2 percent of any earnings up to $132,900. Per FICA requirements, employers must match an employee’s amount and contribute the funds to the Social Security Trust Fund to support disability insurance in addition to Medicare benefits and retirement income.
Workers’ Compensation Insurance
Employers in Texas aren’t required to carry workers’ compensation insurance. Although Texas doesn’t make state-regulated workers’ comp insurance mandatory for employers to offer, it’s common for private employers to provide coverage to contend with work-related injuries or illnesses that their employees sustain. Without any coverage for workers’ compensation insurance, you risk paying for any costs related to issues such as personal injury lawsuits or missed and incomplete employee wages.
Texas’ workers’ comp laws stipulate that employees have up to 30 days to provide their employer with a notice that they’ve been injured or fallen ill due to work. Employees can then have up to a year to submit their formal paperwork for their workers’ compensation claim. Employers have just eight days to let their insurer know about their employee’s claim. Depending on the situation, employees may need to visit a physician to become eligible to receive workers’ comp benefits.
How To Do Payroll 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.
- The Form W-4 provides 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.
- The Form I-9 is 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.
- The Form W-2 is 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.
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.
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
Texas Payroll Taxes: FAQs:
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 resources for business loans and financing for Texas businesses!