Before you hire your first employee in the state of Texas you should understand what is required of you as an employer. Every company that pays employees in the state of Texas has specific administrative and tax obligations. Not fulfilling these obligations could result in the loss of the Company's charter and hefty fines.
Federal Employer Identification Number (EIN)
If you plan to be an employer in the state of Texas or any other state, you will need a Federal Employer Identification Number, commonly called an EIN or FEIN. You will need to get an EIN before you hire any employees.
An EIN is like a Social Security Number for a business. It is assigned by the US Internal Revenue Service (IRS). An EIN is used to identify your business both to the IRS and the state of Texas.
You can pay a business services company to get your EIN or you can do it yourself online at the IRS website.
You should understand the information that the IRS requires for your EIN before you try to get it online. Refer to IRS Form SS-4 for guidance.
Depending on the exact nature of your business you may need to register one or more employer accounts with the state of Texas. You will need your EIN in order to complete the registration process.
Texas State Tax ID
If you plan to make a profit in the state of Texas, then you will have to register your business with the Texas Comptroller of Public Accounts. There are a few tax classifications that are available to a Texas business. You should understand the nature of each tax classification type and the implications to your business before you register for a Texas State Tax ID.
If you plan to sell or lease tangible personal property in Texas or sell taxable services in Texas then you must register your business with the Texas Comptroller.
Comptroller of Public Accounts Contact Information
111 East 17th Street
Austin, TX 78774
Register as a Texas Employer
Employers must register for an Unemployment Tax Account with the Texas Workforce Commission within 10 days of first hiring any employees.
After successfully registering for a new Unemployment Tax Account , employers will receive a Texas Workforce Commission Tax Account Number. The Tax Account Number is used to identify your business whenever you correspond with the Workforce Commission.
Income and Payroll Tax Withholding
Texas does not have a Personal Income Tax. Texas employers do not need to withhold state income tax from their employees' wages. Texas employers, however, still do have an obligation to withhold Federal Income and Payroll Taxes from their employees' wages.
As a Texas employer you are required to withhold Federal Payroll and Income taxes from your employees' wages. Payroll taxes include Social Security and Medicare taxes. Employers send the withheld amounts to the federal government.
The US Internal Revenue Service requires that every employee must provide an employer with a signed withholding exemption form, IRS Form W-4, on or before the date of employment. The employer must then submit Form W-4 to the IRS. Employers use Form W-4 to determine how much Income and Payroll Tax to withhold from each employee's wages. Note that independent contractors are not considered to be employees.
The amount withheld for each employee is expected to be the employee's approximate tax obligation to the federal government.
The Texas Unemployment Insurance program is administered by the Workforce Commission.
Texas Unemployment Insurance is an employer obligation. Payments are not deducted from an employee's wages. The Texas Unemployment Insurance program is part of a nation-wide program administered by the US Department of Labor. Unemployment Insurance provides temporary payments to individuals who are unemployed through no fault of their own.
Unemployment Insurance is, like other insurance policies, a numbers game. Employer tax liability is based on a percentage of each employee's wages. When a new Texas employer registers for Unemployment Insurance, the state has no numbers on which to base the percentage. First time Texas employers are assigned an introductory rate based on the type of business and number of employees among other factors.
After the state has had enough time to compile insurance numbers on your business (total contributions vs. total paid to former employees over time) they will assign an "Experience Rate" to compute the percentage of wages to be paid going forward. The percentagde rate is commonly adjusted on an annual basis.
Texas employers must register with the Texas Workforce Commission within ten days of paying an employee wages.
Employers are also responsible for paying taxes and filing Quarterly Reports with the Texas Workforce Commission.
A Texas employerâ€™s Unemployment Insurance tax rate determines how much the employer owes in state Unemployment Insurance taxes. Each new Texas employer is assigned an entry-level rate which is normaly around 2.7%. The rate is adjusted over time as the Texas Workforce Commission accrues employee wage data for the employer,
To calculate the amount of Unemployment Insurance tax payable, multiply the amount of each employee's taxable wages by the employerâ€™s tax rate. The maximum amount of taxable wages per employee, per calendar year is set by statute and is currently $9,000.
Workforce Commission Contact Information
Federal Unemployment Tax Act (FUTA) Tax
The Federal Unemployment Tax Act is a federal law that imposes an unemployment tax on employers. The FUTA tax funds the federal government's oversight of each state's unemployment program. Only employers pay FUTA tax; there is no requirement for withholding amounts from employee wages. Employers must deposit the tax quarterly and file an annual form.
FUTA Tax is used to fund the administrative costs of the Texas Unemployment Insurance program while Unemployment Tax is used solely for the payment of benefits to unemployed Texas workers.
The current FUTA tax rate is 6%. FUTA tax only applies to the first $7,000 you pay to each employee in a calendar year. You will stop paying FUTA taxes on an employee's wages once you pay the employee more than $7,000. Currently, the largest FUTA amount you will have to pay is $420 per employee ($7,000 x 0.06).
If you have FUTA tax liabilities, you need to make quarterly deposits and file IRS Form 940.
All employers must now deposit FUTA taxes by using electronic funds transfer (EFT). Usually, EFT payments are made using the Electronic Federal Tax Payment System (EFTPS). EFTPS is a free service offered by the U.S. Department of the Treasury that allows you to pay federal taxes online or over the phone. When you request a new EIN and indicate you will have federal tax payments, you are automatically pre-enrolled in EFTPS. The IRS will notify you about the pre-enrollment and how you can activate the account. If you are not pre-enrolled, you can sign up directly on the EFTPS website or by calling the EFTPS at 800-555-4477.
Workers' Compensation Insurance
The state of Texas does not require an employer to have Workers' Compensation Insurance coverage. However, not having Workers' Compensation Insurance covergage leaves an employer open to personal injury lawsuits from employees who are injured on the job.
On average the current cost of an approved Workers' Compensation Insurance policy in Texas is approximately $0.75 per $100 in payroll.
Disability Insurance pays benefits to employees who are unable to work due to non-job-related accidents or illnesses. The state of Texas does not require employers to provide Disability Insurance to employees. Texas employers may provide Disability Insurance but are not required by law to do so.
New Hire Reporting
Both federal and state law requires all Texas employers, both public and private, to report all contractors and newly hired employees to the state within 20 days of the hire date. Along with new employees, all Texas employers are also required to report employees who are rehired after a separation of 60 days or more, including individuals who remain on the payroll during the separation. Generally if an employee is required to fill out IRS Form W-4, you must report that employee as a new hire.
State and county agencies use this information to assist in locating parents who are delinquent in their child support obligations.
Federal law requires employers to verify an employee's eligibility to work in the United States. Within three days of hire, employers must complete Form I-9, employment eligibility verification, which requires employers to examine documents to confirm the employee's citizenship or eligibility to work in the U.S. Employers can only request the documentation specified on the I-9 form.
Employers do not need to submit the I-9 form to the federal government but are required to keep them on file for three years after the date of hire or one year after the date of the employee's termination, whichever is later.
Both the federal and Texas governments require employers to post certain specific information related to wages, hours and working conditions in a location used by employees where they can be easily read during normal work hours. The postings are commonly in a break or lunch room.
Posting requirements vary by type and size of business. All mandatory posters are available free from the federal government or from the state of Texas.
Posters required by the federal government are available from the US Department of Labor
Provide a Wage and Tax Statement to Each Employee
Texas employers must provide each employee with an IRS Form W-2, Wage and Tax Statement, each year. Form W-2 includes the total amount of the employee's wages withheld for the past year, as well as the amount of specific deduction categories. Form W-2 must be filed by January 31st each year for the previous tax year.
Texas employers must also file IRS Form W-3, Transmittal of Wage and Tax Statements. Form W-3 contains a summary of the total employee withholding amounts which a Texas employer withheld during the year. Form W-3 with all IRS Forms W-2 attached must be filed before the last day of February.