As one of the world’s largest economies and the second-largest in the United States, Texas is an appealing location for starting or expanding a business. However, it’s crucial to meet Texas payroll tax obligations by understanding both federal laws and how Texas Workforce Commission (TWC) unemployment taxes work. Efficiently managing these state-specific payroll tax issues ensures smooth operations. Here’s what you need to know about Texas payroll tax obligations.
Understanding Texas Payroll Taxes
Texas residents need federal income taxes withheld from their paychecks, as required of most American employees. The withholding rate is determined by the IRS Form W-4, based on the employee’s filing status, dependents, and other income sources.
However, Texas does not have a state income tax. There are also no municipal income taxes since the Texas state constitution explicitly prohibits taxes on personal income. This equates to higher take-home pay for most Texas employees and one less withholding item for Texas employers to be concerned with.
The primary employer payroll responsibilities are the Federal Insurance Contributions Act (FICA), which encompasses Social Security and Medicare, the Federal Unemployment Tax Act (FUTA), and the Texas Workforce Commission (TWC) Unemployment Tax, or SUTA.
FICA (Federal Insurance Contributions Act)
- Employer Contribution: 7.65% of each employee’s wages, with 6.2% for Social Security and 1.45% for Medicare.
- Earnings Cap: Social Security contributions cap at $168,600 for 2024. There is no cap on Medicare contributions.
FUTA (Federal Unemployment Tax Act)
- Employer Contribution: 6% on the first $7,000 of each employee’s wages annually.
- Potential Reduction: Texas employers may qualify for a reduced FUTA rate if they pay Texas unemployment taxes (TWC/SUTA) on time, lowering the net FUTA rate to 0.06%.
TWC/SUTA (Texas Workforce Commission/State Unemployment Tax Act)
- Employer Contribution: Based on the first $9,000 of an employee’s wages annually.
- Tax Rates: Vary depending on the employer’s status (new or existing), timeliness of payments, and chargebacks. The general tax rate for 2024 is 1.22%.
Texas Unemployment Tax
The Texas Unemployment Tax is comprised of several components:
- General Tax Rate (GTR): 1.22% for 2024.
- Replenishment Tax Rate (RTR): 0.15% for 2024.
- Obligation Assessment Rate (OA): 0% for 2024.
- Deficit Tax Rate (DTR): 0% for 2024.
- Employment and Training Investment Assessment (ETIA): 0.1%.
Combining all five components, the total unemployment tax rate for Texas employers in 2024 ranges from a minimum of 0.25% to a maximum of 6.25%.
State-Specific Deductions
Texas does not impose state-specific payroll taxes, such as mandatory contributions for disability insurance, which are required in some other states. However, employers must still manage federal deductions, including student loan garnishments, child support, tax levies, and other court-ordered payments. It is crucial for employers to ensure that these wage garnishments are correctly paid to the appropriate authorities to avoid penalties.
Employer Responsibilities and Best Practices
Employers must accurately report employee compensation and payroll taxes, including both mandatory and voluntary deductions. Key practices to ensure compliance include maintaining accurate reporting, which involves ensuring that all compensation and tax information is correctly reported to tax authorities.
Efficient record-keeping is also essential, and using cloud-based systems can provide secure, real-time updates, making it easier to manage changing tax rates and employee data. Additionally, staying compliant by filing early and paying on time helps avoid costly penalties and disruptions.
Outsourcing Payroll
Outsourcing payroll to professionals can provide additional support, allowing you to focus on growing your business. Payroll experts stay updated on tax changes, including state-specific issues, and offer tailored solutions for your business needs.
While Texas may have fewer payroll taxes and regulations than other states, staying on top of TWC rates and policy changes is crucial. By complying and paying early, you can save money and avoid disruptions. Contact Affiliated HR & Payroll Services for expert assistance with managing your payroll taxes and ensuring compliance with Texas regulations.
Client Service Representative at Affiliated HR & Payroll Services