How to Do Payroll in Texas: A Process for Employers

Payroll in Texas involves navigating federal and state regulations. While Texas stands out for not having a state income tax, employers have responsibilities concerning federal taxes, unemployment insurance, and wage laws. Understanding these obligations is fundamental for any business operating in the state. This guide clarifies the steps for managing payroll.

Establishing Payroll Foundations

Before processing any payroll, employers must establish essential accounts and gather specific employee information. A primary requirement is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number acts as a federal tax ID for businesses and is necessary for reporting federal taxes. Employers can apply for an EIN directly through the IRS website.

Beyond federal requirements, Texas employers need to register with the Texas Workforce Commission (TWC) to obtain an account number. This TWC account number is crucial for managing state unemployment insurance (SUI) taxes, which fund benefits for eligible unemployed workers in Texas. Registration can be completed through the TWC’s online portal.

Collecting accurate employee information is a foundational step. Employees must complete Form W-4, Employee’s Withholding Certificate, which provides employers with details about their tax situation, guiding the amount of federal income tax to withhold from their paychecks. Employers are required to complete Form I-9, Employment Eligibility Verification, for each new hire to verify identity and legal authorization to work. If offering direct deposit, collecting bank account details and authorization from employees.

Understanding Texas wage payment laws is important. Texas Payday Law generally requires employers to pay non-exempt employees at least twice per month on regularly scheduled paydays, while exempt employees must be paid at least once per month. When an employment ends, final paychecks for involuntarily separated employees are due within six calendar days. For voluntary resignations, the final paycheck is due on the next regularly scheduled payday.

Permissible deductions from wages are generally limited to those required by law (like tax withholdings), court-ordered deductions (such as child support garnishments), or those authorized in writing by the employee for a lawful purpose. Texas does not impose a state income tax, so employers are not required to withhold state income tax from employee wages.

Calculating Employee Pay and Withholdings

Calculating employee pay involves determining gross wages and then applying withholdings and employer-paid taxes. Gross pay is the total amount earned before deductions. For hourly employees, this includes overtime pay at 1.5 times their regular rate for hours worked beyond 40 in a workweek, as mandated by the Fair Labor Standards Act (FLSA).

Federal income tax withholding is determined by the information provided on an employee’s Form W-4. Employers use IRS tax tables or computational methods to calculate the amount to deduct from each paycheck. The goal is to withhold an amount that matches the employee’s annual tax liability.

FICA taxes, which fund Social Security and Medicare, are mandatory withholdings. Both employees and employers contribute. For Social Security, each pays 6.2% of wages up to an annual wage base ($168,600 for 2024). For Medicare, both pay 1.45% of all wages, with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding certain thresholds ($200,000 for single filers), which is solely an employee responsibility.

Federal Unemployment Tax Act (FUTA) tax is an employer-paid tax for the federal unemployment insurance program. This tax applies to the first $7,000 of each employee’s wages annually, at a federal rate of 0.6% for most employers. Employers generally receive a credit for state unemployment taxes paid, which reduces the effective federal rate.

Texas also requires employers to pay state unemployment tax to the Texas Workforce Commission (TWC). This is an employer-paid tax; employees do not contribute to state unemployment. New employers are assigned a tax rate for their first two to three years, adjusted based on their experience rating. The taxable wage base for Texas unemployment tax is the first $9,000 of an employee’s wages each calendar year. Employers calculate their contribution by multiplying taxable wages by their assigned TWC tax rate.

Beyond federal and state payroll taxes, other deductions may apply. These include pre-tax deductions, such as 401(k) contributions or health insurance premiums, which reduce an employee’s taxable income. Post-tax deductions, like wage garnishments or union dues, are taken from an employee’s net pay after taxes have been withheld.

Submitting Payroll Taxes and Reports

After calculating employee pay and withholdings, employers must submit taxes and file reports to federal and state agencies. For federal taxes, employers deposit federal income tax, Social Security, and Medicare taxes through the Electronic Federal Tax Payment System (EFTPS). The deposit schedule, monthly or semi-weekly, depends on the total tax liability during a lookback period. Monthly depositors remit taxes by the 15th of the following month; semi-weekly depositors have deadlines based on payday.

Several federal payroll tax forms must be filed. Form 941, Employer’s Quarterly Federal Tax Return, reports wages, tips, and federal income, Social Security, and Medicare taxes withheld quarterly. This form is due by the last day of the month following the end of each quarter (April 30, July 31, October 31, and January 31). Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, reports the employer’s FUTA tax liability for the year and is due by January 31 of the following year, with an extension to February 10 if all FUTA taxes were deposited on time.

At the close of the calendar year, employers must prepare Form W-2, Wage and Tax Statement, for each employee, reporting annual wages and taxes withheld. Copies of Form W-2 must be provided to employees by January 31 of the following year and submitted to the Social Security Administration (SSA) along with Form W-3, Transmittal of Wage and Tax Statements, by the same deadline.

For Texas unemployment, employers must file quarterly wage reports and pay unemployment taxes to the Texas Workforce Commission (TWC). These reports detail employee wages and calculate the employer’s unemployment tax liability. Electronic filing and payment through the TWC’s online systems, such as Unemployment Tax Services (UTS) or QuickFile, are required and due by the last day of the month following the end of each quarter (April 30, July 31, October 31, and January 31).

Texas employers must report new hires to the Child Support Division of the Office of the Attorney General. This reporting helps ensure child support obligations are met. Employers must report new or rehired employees within 20 calendar days of their hire date, which can be done through the Attorney General’s online portal.

Managing Payroll Documentation

Maintaining payroll documentation is important for compliance and business operations. Employers should keep records including timecards, payroll registers, copies of all filed federal and state tax forms (such as Forms 941, 940, W-2, W-3), and employee documents like Forms W-4 and I-9. Other records include direct deposit authorizations, wage garnishment orders, and agreements for voluntary deductions.

Federal regulations specify retention periods for payroll records. The IRS requires employers to keep employment tax records, including income, expenses, and payroll, for at least four years after the tax due date or payment date, whichever is later. The Fair Labor Standards Act (FLSA) requires retaining payroll records for a minimum of three years, with supporting documents for wage computations, such as timecards, kept for two years. Form I-9s must be retained for three years after the hire date or one year after termination, whichever is later.

Organized recordkeeping ensures compliance with federal and state laws, helping avoid penalties during audits or investigations. Well-maintained records also serve as evidence in employee disputes, wage claims, or legal challenges. Establishing a systematic approach to record retention simplifies future payroll processing and reporting.