Trying to calculate payroll for your small business can be confusing and time-consuming, especially when you’re new to doing business. While Texas is a large state, Texas has just a few payroll taxes to account for, but following federal and state guidelines is imperative to a successful payroll run. In this article, we explain the steps you need to go through when setting up and running payroll in the state of Texas.
How To Do Payroll in Texas in 5 Steps
When managing your employees’ payroll, not only must you pay your employee the agreed-upon wage, but you must also account for taxes, benefits, and other nuances. To get you well-equipped before you start dispensing paychecks, check the federal and state laws, employee documentation for proper completion, accurate calculation with respect to the laws, mandatory taxes accounted for, and a sufficient record-keeping system.
Step 1: Check Your Local Laws
Before you begin developing your payroll system, understand your federal and state laws so that you can ensure compliance and avoid fines and repercussions. In the state of Texas, you should understand new hire reporting requirements, when to offer overtime pay, meal and break regulations, and frequency of pay.
New Hire Reporting: Federal and state law requires that business owners submit new hire information to the Employer New Hire Reporting Operations Center in the Texas Office of the Attorney General within 20 calendar days. If you are unsure whether you need to report a new employee, then know if they have completed a W-4 form, chances are you need to report their new hire information.
If an employer delays or refrains from submitting new hire reporting, they may face penalties of $25 for every occurrence they don’t submit a report. If an employer is found conspiring with employees to falsify or insufficiently complete reports, they may face additional penalties up to $500.
Minimum Wage: The minimum wage in Texas is $7.25, however certain exemptions exist. Additionally, Texas employers should use a minimum wage of $2.13 and together with a maximum tip credit of $5.12. At the employer's discretion and under certain conditions, they may also count any lodging or meal value toward the minimum wage.
Overtime Pay: The Fair Labor Standards Act (FLSA) requires that employers in Texas pay overtime to employees working beyond a standard 40-hour workweek. Although Texas doesn’t use labor laws for the payment of overtime, Federal overtime laws do apply. set overtime at 150 percent the regular pay rate for an employee.
Meal/Break Pay: Texas does not have labor laws pertaining to meals and breaks or severance pay either, and the federal government does not require the state to provide them. Employers in Texas who do provide breaks must still pay employees if the 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.
Frequency of Pay: Employees defined as an executive, administrative, or professional employees are required to be paid at least once a month. Other types of employees are required to be paid twice monthly and, unless an employer stipulates otherwise, that paydays must fall on the first and 15th day of each month. Additionally, per the Texas Payday Law, employers may only use electronic transfers, checks, or cash to pay their employees, unless an employee agrees, in writing, to an alternative form of payment.
Other Laws: No state or federal law requires an employer to pay additional wages for employees working on specific days of the year such as holidays or weekends. Similarly, an employer is not required to offer fringe benefits such as vacation time, holiday pay, or hours not worked. The employer may offer these benefits at their discretion and in writing.
Step 2: Gather Employee Documentation
Gathering all your necessary documentation will ensure accurately completing payroll and abiding by federal and state regulations. Both employer and employee are required to complete the following documents:
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- W-4: Provides business owners with the information they need to calculate the tax amount to withhold from employee wages for contributions to federal income tax. You should remind your employees that they are responsible for updating their W-4 to reflect recent life changes that may alter their tax contributions. These forms can be found here.
- I-9: This form verifies an employee is legally able to work in the US. The I-9 document must be completed on an employee’s first day, but employers have three business days to complete their section of the form. For more information regarding the completion of the I-9, visit the U.S. Citizenship and Immigration Services website.
- W-2: At the end of each year, the IRS requires employers generate a W-2 document to send to every employee. A W-2 form contains income and their tax information, such as the amount of social security and medicare taxes that were withheld from that employee during that fiscal year. To learn more about W-2 form provisions and to download the form, visit the IRS website.
Step 3: Calculate Your Employee’s Pay
To simplify payroll, you may want to consider using payroll software. This can turn calculating an employee’s pay into one of the simplest parts of running payroll taxes because this software can monitor your employees’ timesheets and attendance. Calculating employee pay by yourself is feasible if you only have a few employees, and you may want to consider outsourcing. In any case, remember to account for any tips that your employees receive along with their commission, paid-time-off (PTO)/sick leave, and overtime pay in addition to their standard salaries and hourly wages.
As a reminder, the minimum wage in Texas is $7.25 for standard employees and $2.13 for tipped employees. If an employee does not earn up to their total compensation level, the employer is responsible for making up that difference. Ensure your employee’s paycheck meets their minimum wage level, otherwise, it is time to pay up. If an employer wishes to make a payroll deduction, they must receive written authorization. An employer may not make deductions unless:
- They are mandated to do so by court-order
- They are authorized by state or federal law, such as IRS withholding
- They have been authorized in writing by the employee
If you are using payroll software, it would be beneficial to have your employees verify that their hours documented are correct. This will help you accurately reflect wages in their paychecks, and avoid over-or under-paying your workers, and thus avoiding any further complications.
Step 4: Deduct Required Taxes
Texas has some of the leanest payroll tax regulations, and only requires employers to pay one state-level tax, unemployment insurance (UI). When it comes to payroll taxes in Texas, employers, including small business owners, do not need to report state or local income tax on behalf of their employees. These Texas regulations reduce the taxable income employees pay, making Texas an appealing place to work.
Taxes paid by only the employer include the federal unemployment tax (FUTA), whereas taxes made solely by the employee include federal income tax and additional Medicare tax, if applicable. Both employer and employee are required to pay FICA (social security and medicare tax), and any savings account contributions as decided by the employer. Texas is one of the many states that do not levy an estate or inheritance tax, which includes local jurisdictions. Local jurisdictions may, however, impose property taxes toward the funding of schools, or first responders in their region.
Federal Income Tax: Employers, state agencies, and higher education institutions must deduct federal income tax from the wages of state officers or employees. These payments are made only by the employee but determined based on their W-4 to determine total withholdings for federal income tax. Employers must submit this wage and tax information to the IRS and Social Security Administration at the end of each calendar or tax year.
Federal Unemployment Insurance (UI): Also referred to as “FUTA,” meaning Federal Unemployment Tax Act, is a 6 percent payroll tax paid by employers and collected on the first $7,000 of an employee’s wages. Earnings beyond $7,000 are not subject to unemployment insurance taxation. Generally, employers will receive a 5.4 percent credit when they file Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Texas Unemployment Insurance: Texas unemployment insurance provides benefits to unemployed workers, those on family leave, and disabled individuals. UI rates fall between 0.31-6.31% but change annually, and are determined using the taxable wage base of the first $9,000 of an employee’s wages every year. These rates vary between businesses and are dependent upon the number of employees, duration of your business, and unemployment benefits already charged.
Social Security: Social Security is a federal insurance program providing benefits to disabled and elderly individuals. This is also referred to as “FICA” taxes, the Federal Insurance Contributions Act, which also includes Medicare. Both the employee and the employer are responsible for paying 6.2% in contributions for Social Security tax for earnings up to $132,900.
Medicare Tax: The Medicare tax rate is 1.45% of all earnings of both employer and employee. Additional Medicare tax needs to be paid depending on the filing status of an employee. For an employee making over $200,000, the employee is responsible for an additional 0.9% in Medicare tax.
Savings Account Contributions: employers need to send their employee’s contributions to social welfare programs that range from health insurance and life insurance programs to retirement plans and 401(k)s.
Step 5: Manage Your Records
If you are managing your own payroll, it would be worth your time to create a system with which you can save relevant employee information and documentation. In the event that an employee is terminated, or you are onboarding many new hires, a comprehensive record-keeping system will enable you to more efficiently submit any necessary information, or prevent missing pieces of information. You may consider organizing your records in the following order:
- Full name and social security number of employee
- Address and zip code
- Employee’s schedule
- Total hours worked each day by an employee
- Type of pay (hourly/salary)
- Pay rate
- Overtime or other additional compensation
- Paycheck deductions
- Payment dates and periods
When you are about to distribute paychecks, and after you determine your tax withholdings and net pay for your employees, you can either process your paychecks manually, or use direct deposits. If you are using a direct deposit system, you will need to take care of a one-time setup for each employee you’ll be paying. If you have just a few employees, using payroll software will help automate your distribution process, although you may want to consider outsourcing your paycheck distribution to a third party if you have a larger company.
How To Do Payroll In Texas for Small Businesses Frequently Asked Questions (FAQs)
If you are new to doing payroll taxes in Texas as a new or small business owner and want to reduce your chances of miscalculation, consider the following questions to give you greater confidence and peace of mind.
What happens if I make a payroll mistake?
If you accidentally make a payroll mistake, you may get reported to the Department of Labor (DOL), but if it is clear that the mistake was not deliberate, they may be lenient in repercussions. Although, you will still likely have to pay back the wages, and you may get sued or fined. Checking your local laws, outsourcing, or utilizing payroll software will help ensure compliance. It is also possible that your employee comes to you first, having noticed the mistake and allowing you an opportunity to check and correct the paycheck.
How do I keep track of my taxes as an employer?
Setting up an organized record-keeping system will help you ensure that all employee documents are accounted for. When it comes to payroll taxes, different tax deposit rules apply to income, social security, and federal unemployment tax. To keep track of tax deadlines, check the IRS 2021 Tax Calendar.
What happens if an employee is terminated?
If an employee has lost their job, they are still entitled to certain rights such as continuing health coverage and sometimes unemployment compensation. Unemployment Insurance is a required payroll tax to provide financial assistance to unemployed workers that meet state requirements. To ensure that you are compliant with federal guidelines, review the DOL Termination provisions.
Calculating payroll in Texas as a small business owner may seem daunting at first, but familiarizing yourself with the federal and state laws will paint a clearer picture of what is required. Additionally, working with your employees and staying on top of documentation will not only help you as the employer but also help the employee ensure receipt of an accurate paycheck.
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