How do I set up payroll for my first employee in Texas?
If you don’t already have a federal Employer Identification Number, that’s step one. You can apply on the IRS website and receive it immediately. You need this before you can register anywhere else or process payroll.
Next, register with the Texas Workforce Commission for unemployment insurance. Texas requires employers to pay state unemployment tax (SUTA) on employee wages. Your initial tax rate depends on your industry, and it adjusts over time based on your claims history. You’ll file quarterly wage reports and make SUTA payments through the TWC system.
The good news about Texas is there’s no state income tax. That means you don’t have to withhold state income tax from employee paychecks, which removes one layer of complexity that employers in most other states deal with. But don’t let that make you think payroll is simple. Federal requirements carry plenty of weight on their own.
Before your employee starts working, collect a W-4 for federal withholding and an I-9 to verify employment eligibility. You’re also required to report the new hire to the Texas Attorney General’s office within 20 days. This is a legal requirement and there are penalties for skipping it.
For every pay period, you’ll need to calculate and withhold federal income tax based on the employee’s W-4, Social Security tax at 6.2%, and Medicare tax at 1.45%. You as the employer match the Social Security and Medicare amounts, so your actual cost is the employee’s gross pay plus roughly 7.65% on top. Deposit these taxes with the IRS on time. Whether you deposit monthly or semi-weekly depends on your total tax liability, and the IRS will tell you your deposit schedule.
File Form 941 with the IRS each quarter to report wages paid and taxes withheld. At year end, you’ll issue a W-2 to your employee and file W-3 with the Social Security Administration.
Workers’ compensation insurance is not required in Texas, which makes it one of the few states where it’s optional. That said, going without it is a risk. If an employee gets hurt on the job and you don’t carry coverage, you could be personally liable for medical costs and lost wages with no cap. Most bookkeepers in Pearland and business advisors will tell you to get it anyway.
The biggest mistake first-time employers make is trying to handle all of this manually. Calculating withholding, making deposits on time, filing quarterly reports, and staying compliant adds up fast. Most small business owners either use payroll software like QuickBooks or Gusto to automate the calculations and filings, or they outsource it entirely. Payroll system setup and training can get everything configured correctly from the start so you’re not guessing about tax rates or deposit schedules.
Getting payroll right from day one matters more than people realize. Mistakes with withholding or late deposits trigger IRS penalties that compound quickly. It’s much easier and cheaper to set it up properly now than to fix problems later.
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