Operational Gaze:
How to Run Payroll in Texas?

February 20th 2024

Texas is known to be a tax-friendly state, but it also has a unique set of labor laws, taxation requirements, and reporting mandates that can be challenging to grasp. These regulations span a broad spectrum, encompassing everything from minimum wage standards to workers’ compensation insurance, making it absolutely essential to stay well-informed. Failure to do so can result in costly errors and penalties. And nobody wants that.

This is why we’ve made this guide to provide you with straightforward, easy-to-follow steps and valuable insights that will make running payroll in Texas a breeze. Whether you’re an experienced professional or new to the task, this guide will empower you to manage payroll efficiently, ensuring your business remains compliant and your employees are fairly compensated.

This Article Covers

Laws That Affect Payroll Procedures in Texas
Worker Classifications in Texas
Payroll Forms and Relevant Bodies in Texas
Applicable Taxes in Texas
Key Pay Elements That Impact Payroll in Texas
Step-by-Step Guide to Payroll in Texas

Laws That Affect Payroll Procedures in Texas

In the great state of Texas, payroll procedures are influenced by a mix of state and federal laws. These laws encompass various aspects, including minimum wage, overtime, leaves, breaks, and more. All of which significantly impact the way your payroll operations are conducted.

Understanding these laws ensures that your employees are fairly compensated and lets you avoid costly legal penalties for non-compliance.

Texas Laws

  • Texas Labor Code: The Texas Labor Code covers a wide range of employment laws in Texas. It sets rules for things like wages, fair work practices, discrimination, and worker’s compensation. It’s important to note that the Texas Labor Code also cites federal laws like the Federal Labor Standards Act (FLSA) when it comes to minimum wage and overtime rates. This is because Texas doesn’t have its own minimum wage and overtime laws and instead adopts federal standards.
  • Minimum Wage and Overtime: As of 2023, the minimum wage in Texas is at $7.25 per hour following the rates set by the FLSA. This puts the overtime rate, which is 1.5 times the regular hourly rate, at $10.88 per hour. Download U.S. Minimum Wage 2024 Poster now.
  • Paid Breaks or Lunch Period: Texas labor laws do not require employers to provide their employees a meal period or break. It’s up to the employer to decide work schedules, including breaks, based on business needs. If employers do decide to give employees breaks, they will need to follow the rules set by the Department of Labor (DOL). According to DOL, short breaks (20 minutes or less) must be paid because they help productivity. Lunch breaks (30 minutes or more), where an employee is completely off-duty and not working, don’t have to be paid.
  • Pay periods: As per the Texas Payday Law, employers have to display payday information at work. If they don’t choose payday dates, it defaults to the 1st and 15th of each month.
  • Paid Time Off and Leaves: There’s no law in Texas that makes it mandatory for private-sector employers to offer paid or unpaid leave. However, they may need to provide unpaid leave as a reasonable adjustment if someone has a disability, is pregnant, or has another condition protected by a specific law. Most employers do offer some form of paid leave, but the amount is up to the company. If it’s stated in a written policy or agreement, it’s legally binding under the Texas Payday Law.
  • Payroll Recordkeeping: Employers in Texas are required to keep payroll records that contain the wages paid to each individual for each pay period, along with the payment dates and any other payments they received. According to the Texas Workforce Commission Rule 815.106, these records must be kept for four years.
  • Payroll Taxes: Texas is one of only five states, alongside Alaska, Florida, South Dakota, and Wyoming, that doesn’t impose any business tax, personal income tax, or fees on sole proprietors. This allows sole proprietors in Texas to reinvest more of their profits into their businesses. Although Texas doesn’t have a state income tax, employers are still responsible for paying unemployment and disability taxes.
  • Retirement Benefits: Private employers are not obligated to offer retirement benefits to their employees. However, if a business owner decides to provide such benefits, they must follow the rules set by the Employee Retirement Income Security Act (ERISA). ERISA requires that employees who work at least 1,000 hours in a year must be given the choice to join a pension or retirement plan.
  • Final Pay: As per Texas Labor Code 61.014, when an employee is involuntarily separated from their job (e.g., laid off, discharged, or fired), their final pay must be given to them within six (6) calendar days of the separation. If the employee chooses to leave the job voluntarily (e.g., quits or retires), their final pay should be provided on the next regularly scheduled payday after their departure. Unused wages for fringe benefits such as vacation, holiday, sick leave, parental leave, or severance pay may be owed to an employee, but only if the employer has a written policy or agreement that provides these benefits.

Federal Laws

  • Fair Labor Standards Act: The FLSA, established in 1938, is an essential federal law that sets hourly wages and overtime pay rules. It also outlines employee classification standards, child labor regulations, and recordkeeping of employee work hours.
  • Family and Medical Leave Act: The FMLA is a vital federal law that regulates time off at work. It allows eligible employees to take up to 12 weeks of unpaid leave for reasons like childbirth, adoption, or caring for a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA) Tax: Both employers and their employees are required to pay FICA taxes. For Social Security taxes, both businesses and workers contribute 6.2 percent of their earnings up to $132,900. Additionally, the Medicare tax rate is 1.45 percent of a business’s and a worker’s yearly income. These rates may change annually according to IRS guidelines, so it’s essential to keep track of them.

HR Laws

  • Child Labor Requirements: The Texas Child Labor Law applies to anyone under 18 years old. It ensures that young workers are not put in jobs or situations that could harm their safety, health, or well-being. Employing children under the age of 14 is generally illegal, except for specific circumstances. Minors may be paid a lower minimum wage of $4.25 per hour for their first 90 days in a job. If they work in jobs where they receive tips, they should be paid the same as other tipped employees.
  • Posting Requirements: In Texas, all employers must put up posters with important information about various laws, including those related to payroll. Employers who follow the Texas Payday Law need to display a poster with employee-related information. Those under the Texas Unemployment Compensation Act must have a poster detailing unemployment compensation and the Texas Payday Law.
  • Texas New Hire Reporting: Employers are required to let the authorities know about new employees or rehired workers within 20 days of their start date. If you use electronic reporting, make sure to do it at least twice a month, with reports spaced 12 to 16 days apart. Try to do this before the employee receives their second paycheck. You may be fined $525 for each unreported employee if you don’t report new hires.

Worker Classifications in Texas

Worker classification refers to the categorization of individuals working for a company. In Texas, workers can either be categorized as employees or independent contractors. This classification is of paramount importance for payroll management because it determines how payroll taxes, benefits, and labor laws are applied.

Whether a worker is considered an employee or an independent contractor isn’t based on what the worker and the business agree upon but on state guidelines. The Texas Workforce Commission (TWC) uses a 20-point comparative approach to determine this. This approach is also known as the Common Law Test.

Common Law Test

The Common Law Test is a 20-point comparative approach adopted by the Texas Workforce Commission (TWC) to determine the classification of a worker. One of the key factors in this test is the idea of “direction or control.” This means that the law examines how much control the business exercises over the worker.

Other factors that the test uses to tell the difference between employees and contract workers include:

  • Independent contractors choose when, where, and how they do the work.
  • Employees receive training, while independent contractors are already skilled.
  • Contractors can hire their own assistance.
  • Contractors are typically paid per job, while employees receive hourly wages.
  • Employers provide tools for employees, but independent contractors use their own.
  • Contractors run their own businesses and can make profits or face losses. They can also work for multiple businesses and offer their services to the public.
  • An employee can be terminated or leave without consequences, but a contractor can only be let go if they don’t meet contract terms.

Depending on your business, not all 20 factors of the common law test may apply. Nevertheless, this test gives you a starting point for understanding how Texas might classify the workers providing services for your business.

How Worker Classifications Affect Payroll

Employees get paid through their company’s payroll, with taxes taken out by the employer, and the company reports this yearly using W-2 forms.

On the flip side, independent contractors receive their pay without any taxes withheld, and they have to handle their own taxes, including self-employment taxes. If a business pays an independent contractor $600 or more in a year, they must file a 1099-NEC form.

Employers also aren’t required to pay unemployment taxes for independent contractors. This benefit is only available to employees under the Texas Unemployment Compensation Act (TUCA)

Other benefits that employees have that independent contractors don’t are:

  • Overtime pay
  • Minimum wage
  • Workers’ compensation benefits

While hiring independent contractors can save money because businesses don’t pay certain taxes or provide benefits, wrongly classifying workers this way can lead to hefty fines and obligations like unpaid wages, benefits, and taxes. To learn more about the entitlements of both salaried and hourly employees, you can refer to our articles on your rights as a salaried employee in Texas, and your rights as an hourly employee in Texas.

Payroll Forms and Relevant Bodies in Texas

Texas employers will mainly use federal payroll forms, with one exception: the Texas Unemployment Tax Report. There’s no state-specific W-4 form since Texas doesn’t have state income taxes. Instead, the federal W-4 form is used.

To make sure you’re following the tax rules correctly, it’s important to know which forms apply to your business.

Texas Payroll Forms

Texas Unemployment Tax Report: For the Texas Unemployment Tax Report, you need to file a quarterly wage report and pay unemployment taxes. The Texas Workforce Commission has a free Internet system that lets employers with 1,000 or fewer employees efficiently handle their unemployment tax accounts online.

The system will require you to upload a spreadsheet or manually enter the following information:

  • The number of employees (full-time and part-time) during the covered months.
  • The Texas county where most of your employees worked.
  • The number of employees who worked outside the reported county.
  • Each employee’s unique Social Security Number for that quarter.
  • Each employee’s last name and first initial (middle initial is optional).
  • The wages paid to each employee in Texas for the quarter.
  • Any wages paid to employees reported to a state other than Texas, if applicable.

Federal Payroll Forms

There are various federal payroll forms and reports that are required from employers by the Internal Revenue Service. This includes the following:

  • W-4: Helps employers determine tax withholdings from employee paychecks.
  • W-2: Reports an employee’s annual earnings (one per employee).
  • W-3: Summarizes total wages and taxes for all employees for IRS reporting.
  • Form 940: Reports and calculates unemployment taxes owed to the IRS.
  • Form 941: Filed quarterly to report income and FICA taxes withheld from paychecks.
  • Form 944: Reports annual income and FICA tax withholdings.
  • 1099 Forms: Provide non-employee payment info for IRS tax collection on contract work.

It can be hard to keep track of all of these forms and their deadlines. Thankfully, the IRS has a tax calendar that employers can refer to.

Federal and Texas Payroll/ Tax Bodies

  • Texas Workforce Commission: The Texas Workforce Commission (TWC) is the state agency entrusted with overseeing and providing vital workforce development services, including job matching, recruitment, and training, to both job seekers and employers in Texas. TWC also holds responsibility for administering the Unemployment Benefits and Unemployment Tax programs, which significantly impact payroll management in the state.
  • Internal Revenue Service: The Internal Revenue Service (IRS) is the government agency in the United States that deals with taxes. It works under the Department of the Treasury and manages federal tax laws. The IRS does things like collecting taxes, handling tax forms, helping taxpayers, and checking tax matters like audits. Its main job is to make sure people and businesses follow tax laws and pay their taxes.
  • The Social Security Administration: The Social Security Administration (SSA) safeguards the financial security of American citizens throughout their lives. It manages programs for retirement, disability, survivor benefits, and family assistance and helps people sign up for Medicare. The SSA also issues Social Security Numbers, which are vital for jobs, money matters, and accessing government services.
  • Wage and Hour Division: The Wage and Hour Division (WHD) is a part of the United States Department of Labor. Its primary role is to make sure that employers follow labor standards to protect workers’ rights. WHD enforces laws like the Fair Labor Standards Act, which covers things like minimum wage, overtime pay, keeping work records, and child labor rules. Additionally, WHD enforces other laws such as the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the Family and Medical Leave Act.

Applicable Taxes in Texas

Texas is considered to be a tax-friendly state. This is because it does not have a state-level income tax, unlike most states. But while running a business in Texas does have some tax advantages, employers still need to comply with various payroll taxes. 

Here’s a breakdown of the important points you need to know when dealing with payroll taxes in the Lone Star State:

State Taxes

  • Sales and Use Taxes: Before you dive into processing payroll taxes, you need to know your state’s sales and use tax rates. In Texas, the state rate is 6.25 percent, but there’s a kicker. Local entities like municipalities, townships, and districts can add an extra 2 percent to that rate, bringing it to a total of 8.25 percent. This means businesses in Texas must collect sales and use taxes both at the state and local levels. Make sure to check the specific tax rates for your area.
  • Unemployment Insurance Tax: As an employer, you’re required to contribute to unemployment insurance. This means you’ll need to set aside a portion of your employees’ annual incomes, specifically the first $9,000 they earn. The exact rate varies from year to year and is determined by factors like the General Tax Rate, Replenishment Tax Rate, Obligation Assessment Rate, Deficit Tax Rate, and Employment Training Investment Assessment. The percentage you’ll be charged ranges from 0.31 percent to 6.31 percent.

Federal Taxes

  • Income Tax: Texas workers need to set aside a portion of their salary for federal income tax based on their preferences on Form W-4. In 2023, the tax brackets for the 2024 filing season will remain the same as the ones for 2022-2023, which are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. 
  • Federal Insurance Contributions Act (FICA) Tax: Both business owners and their employees have to chip in for FICA taxes. In Texas, you’ll contribute 6.2 percent of wages up to $132,900 for Social Security taxes, and there’s a 1.45 percent Medicare tax on both the employer and employee’s gross pay for the year. These rates can change from year to year, so keep an eye on IRS updates, especially as you become more familiar with handling Texas payroll taxes.
  • Additional Medicare Tax: Employers in Texas also have to withhold 0.9% for additional Medicare tax from employees who meet certain requirements and earn more than $200,000 per year.
  • In addition to the taxes mentioned above, there are a few other federal taxes businesses need to handle. For example, you’ll need to pay 6% of your employees’ first $7,000 in annual earnings to the Federal Unemployment Tax Act (FUTA). You might also want to explore if you qualify for any federal tax credits related to FUTA.

Key Pay Elements That Impact Payroll in Texas

Minimum Wage

The federal minimum wage sets the baseline for employee compensation in Texas. The current federal minimum wage as of 2023 stands at $7.25 per hour. But not all employees will be entitled to the minimum wage. Some exceptions as per the FLSA include:

  • Executive, professional, and administrative employees who earn at least $684 per week
  • Computer employees who earn at least $684 per week or $27.63 per hour
  • Highly compensated employees who earn $107,432 per year or more
  • Farm workers
  • Workers in the fishing industries
  • Seasonal and leisure workers
  • Employees of religious, educational, and nonprofit organizations
  • Professionals and salespeople
  • Certain teenagers and students
  • Employees in entertainment and leisure businesses
  • Non-agricultural firm workers not mandated for state unemployment benefits

Commission and Bonuses

To give an employee an incentive or bonus, you need a clear written agreement for how it will be paid. The agreement doesn’t require fixed amounts or a minimum. However, you can’t change it retroactively; you can only make adjustments for future payments.

Tip Credit 

In Texas, if an employee earns over $20 in tips per month, they’re considered a tipped employee according to US Department of Labor rules. These employees receive a base hourly wage of $2.13, which is less than the federal minimum wage. To guarantee they make at least $7.25 per hour (the minimum wage), employers must compensate for any shortfall between tips and the minimum wage. This is called a “tip credit,” and it’s the employer’s duty to ensure their employees meet the minimum wage when factoring in tips.

Overtime

Texas overtime laws follows federal regulations for overtime pay. In general, employees who work more than 40 hours in a workweek must be paid at a rate of one and a half times their regular hourly rate for each hour worked over 40. Some exceptions apply to certain salaried employees who meet specific criteria, such as the “white-collar” exemption. You can learn more about Texas Overtime Laws in our complete guide.

Pay Stub Laws

While it’s not obligatory to give FLSA-covered employees a pay stub, it’s recommended. If you pay an employee in cash, ask them to sign a receipt confirming the amount, date, and that they received it. This safeguards you in case the employee disputes receiving the money.

If you do give out a pay statement, you must provide employees with a written statement including the following information:

  • Employee’s name
  • Pay rate
  • Total earnings for the period
  • Details of any deductions and their purposes
  • Net pay after deductions
  • Total hours worked

Workers’ Compensation Insurance

Workers’ compensation is a form of insurance that pays for expenses related to employees’ work-related injuries and illnesses. If employees receive workers’ compensation, they generally can’t sue their employer for lost wages or injuries. However, they might be able to sue for matters not covered by the workers’ comp policy.

In Texas, most private employers aren’t mandated to offer workers’ compensation, except those contracting with government entities, who must provide it for their project employees.

Texas Pay Frequency Laws

Exempt employees under the federal Fair Labor Standards Act (FLSA) must be paid monthly, while others should be paid twice a month. The pay periods should evenly distribute the days as much as possible. Employers can choose the specific paydays within these guidelines.

Employers are required to display payday information prominently at the workplace. If employers don’t specify paydays, they default to the 1st and 15th of each month.

Garnishments and Deductions

Employers in Texas must comply with federal and state laws regarding court-ordered wage garnishments and deductions. Common deductions may include:

  • Child support
  • Alimony
  • Voluntary deductions like retirement plan contributions

Final Paycheck

The Texas Payday Law specifically outlines when employees receive their final pay. If someone is let go involuntarily, their final pay must be given within six calendar days. If an employee chooses to leave voluntarily, they receive their final pay on the next regular payday after they resign.

Step-by-Step Guide to Payroll in Texas

By now, you have a good grasp of Texas payroll laws, the relevant taxes, and the essential forms required for compliance. Now it’s time to put it into action. In this section we’ll break down the payroll process into clear, actionable steps, helping you manage it more efficiently.

  1. Identify Payroll Rules Applicable to Your Company: Before you begin processing payroll in Texas, it’s important to understand the specific payroll rules that apply to your business. Payroll rules can vary based on factors such as your industry, the number of employees, and whether you have hourly or salaried workers. Familiarize yourself with Texas labor laws, federal payroll regulations, and other key elements that impact payroll in Texas.
  2. Obtain an Employer Identification Number (EIN): An Employer Identification Number is a unique identifier issued by the IRS for tax purposes. You’ll need an EIN to report employment taxes and other business-related tax obligations. You can apply for your EIN online through the IRS website or by submitting Form SS-4. This unique number is used for tax reporting and identification purposes.
  3. Register with the Texas Workforce Commission (TWC): You’ll also need to register your business with the TWC. This registration is necessary for reporting and paying unemployment taxes. You can easily register online through the TWC’s website.
  4. Determine Employee Classification: Determine whether your workers are employees or independent contractors. Correctly classifying employees is crucial, as it affects how you handle taxes and wage reporting. Misclassifying workers can lead to legal issues and penalties. To guide your employee classification, you can use the Common Law Test.
  5. Collect Employee Payroll Paperwork: Collect essential payroll paperwork from your employees, including W-4 Forms (federal income tax withholding forms), I-9 Forms (employment eligibility verification forms), and Direct Deposit Authorization Forms if employees want their paychecks deposited directly into their bank accounts. Ensure all forms are accurately completed and kept on record.
  6. Track Time and Attendance: Keeping meticulous time and attendance records is key to accurate payroll. Establish a transparent system for tracking work hours, breaks, overtime, and leave. It’s also a good idea to leverage timesheet apps, leave trackers, and payroll hours trackers to minimize errors. Ensure timely approval of employee timesheets before state deadlines.
  7. Establish a Payroll Cycle: Set up a regular payroll cycle. Common frequencies include weekly, bi-weekly, semi-monthly, or monthly. As per Texas Payday Law, if you don’t choose payday dates, it defaults to the 1st and 15th of each month. Ensure that you communicate the payroll schedule to your employees so they know when to expect their paychecks.
  8. Compute Gross Earnings: To determine total earnings, divide the annual salary by the pay cycles for salaried employees or multiply hours worked by the hourly rate for hourly employees. Don’t forget to add extra components like commissions, bonuses, overtime pay, and expense reimbursements.
  9. Calculate Payroll Taxes: Calculate and withhold the required federal and state payroll taxes from each employee’s paycheck. In Texas, you may need to take into account federal income tax, Social Security, and Medicare. Ensure you have the most up-to-date tax rates and use payroll software or tax tables to make these calculations accurately.
  10. Payroll Deductions: Aside from taxes, calculate and withhold any other authorized deductions, such as retirement contributions, health insurance premiums, and wage garnishments.
  11. File Applicable State and Federal Taxes: Submit payroll taxes to the appropriate agencies. In Texas, this includes state unemployment taxes (if applicable). Federal payroll taxes include income tax withholding, Social Security, and Medicare. These are all filed with the IRS.
  12. Process Payroll and Pay Employees: Distribute paychecks or initiate direct deposits to employees according to your established payroll schedule. Provide pay stubs that detail earnings, deductions, and taxes withheld.
  13. Don’t forget to keep payroll records: Maintain detailed payroll records for at least four years. This includes employee pay stubs, tax forms, and payroll reports. Accurate recordkeeping is essential for audits and potential inquiries from tax authorities.

Final Thoughts

Running payroll in Texas can be a challenging task. It requires strict adherence to state-specific minimum wage laws, tax responsibilities, and labor legislation. If you’re looking for ways to further streamline your operations, consider exploring our list of the top 6 apps designed to simplify payroll in the US. Alternatively, if you already have an established system in place, we’ve provided 10 valuable tips to optimize your payroll processes in the US.

By following best practices and leveraging available tools, you can navigate the world of payroll management in Texas with confidence.

Important Cautionary Note

When making this guide, we have tried to make it accurate, but we do not give any guarantee that the information provided is correct or up-to-date. We therefore strongly advise you to seek advice from qualified professionals before acting on any information provided in this guide. We do not accept any liability for any damages or risks incurred for the use of this guide.

 

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