Only a handful of states don’t have an income tax, and Texas is one of them. That means that, as a Texas employer, you do not withhold any state or local income taxes for Texas employees.
So, you’re off the hook when it comes to payroll taxes, right?
Wrong. Texas still has an unemployment tax that employers need to calculate based on their employees’ gross wages and file and pay those taxes to the state. You’ll also need to understand new hire reporting requirements in Texas.
Here’s a full guide on how to set up your business correctly to run payroll in Texas.
Register Your Business in Texas
Before you can run Texas payroll, you need to have a legitimate business recognized by Texas. After registering your business with the Texas Secretary of State, you’ll need to get a Federal Employer Identification Number (FEIN) from the IRS, which you’ll use to register your business for Texas tax payments.
As mentioned, you’ll only need to pay attention to state unemployment tax in Texas rather than state and local taxes.
Texas offers an online portal, Unemployment Tax Services (UTS), for this. Start by signing up for a user ID using your business information. Then, create a password to use for logging into UTS.
The process takes about 20 minutes to complete, and UTS lets you know whether you must pay state unemployment taxes. If so, the system will provide you with your tax account number that you’ll need when you pay and file these taxes.
If you need to update your business information, you can do so at any time through your UTS account.
Report Your New Hires to the State
Any employees that you count in your overall numbers when determining how much unemployment tax you owe in Texas must be reported to the state. Most businesses are required to report all employees.
Texas employers need to report all new hires within 20 days from the date they start earning money with the company. New employers need to report any employees hired within the past 90 days.
Failure to report new hires on time can result in a $25 fine for each occurrence or $500 if the state believes an employer and employee conspired to avoid filing a report or filed one incorrectly or without complete information.
Register an account to use the Texas Attorney General’s new hire reporting system to report your new employees online. New hire information also syncs with the state’s child support system to ensure that employees subject to child support orders can have their wages garnished, if necessary.
Texas does not have state-specific new hire forms for employees to fill out, but you’ll still need to collect the basics, like Form W-4 for federal taxes, Form I-9 for worker eligibility, and direct deposit information.
Calculate, Pay, and File Texas Unemployment Tax
Texas employers pay between 0.25% and 6.25% for unemployment tax in 2024. New employers begin with a 2.7% tax rate, which will likely be higher or lower after their first year or two in business.
The state of Texas calculates your rate and will notify you when your rate changes. Rates for each registered company get reviewed each year, and the state notifies companies in December.
Unlike state and local income taxes, unemployment tax does not get withheld from employee paychecks. Instead, employers pay the tax, but they base it on the amount their employees earn.
In Texas, employers are only required to pay unemployment tax on the first $9,000 in earnings from each employee.
So, as a new employer, you’ll pay 2.7% on the full $9,000 for any employee making at least $9,000 that year, which equals $243. If you have ten employees falling under this category, you will pay $2,430 ($243 x 10).
Now, if you have a temporary employee who will make $6,000 with your company this year, you’d only pay $162 ($6,000 x 2.7%) for that employee.
Texas employers can choose to make voluntary contributions, which are partial or full payments toward chargebacks or unemployment payments made to their former employees, to reduce their unemployment tax rate. This could significantly decrease what you owe in unemployment taxes if you have a high tax rate or several employees.
If you want to make voluntary contributions, you can do so through the UTS system that you’ll use for filing and paying your unemployment tax.
Texas requires unemployment filings and payments quarterly on April 30th, July 31st, October 31st, and January 31st.
If you need further help understanding or filing your Texas unemployment taxes, visit the Unemployment Tax Program page of the Texas Workforce Commission website.
The Foolproof Way to Run Payroll in Texas
Texas is certainly one of the easiest states to run payroll in simply because it doesn’t have state and local taxes for employers to worry about withholding. But that doesn’t necessarily mean it’s easy to run payroll on your own.
In fact, I rarely ever recommend for an employer to do that, even if they only have a handful of employees. There’s just too much that can go wrong.
The best way to avoid miscalculations and missed deadlines when running Texas payroll is to invest in payroll software like Workforce, Gusto, or OnPay.
The best payroll software options are designed to allow you to run payroll whenever you need to, whether you pay monthly, weekly, or need to occasionally run a one-off payroll. They calculate employee wages based on time cards, help you report new hires, and generate whatever payroll forms you need when you need them.
Plus, they’ll manage your Texas taxes to keep you on time and compliant. Your software can set aside what you need to pay and send in your payments on time, allowing you to focus on your business operations instead of payroll.
If you don’t have an HR team yet, payroll software is a non-negotiable. And if you do have an HR team, help them out by giving them a reliable payroll tool that frees up their time, boosts their efficiency, and gives them years of their life back.