Our firm is a small Texas company—two owners and two or three employees, but like many small companies, we started out with one owner and no employees. As time progressed and business increased, we added employees. I am a CPA and a tax attorney, but it was still difficult gathering information across multiple sources to figure out all my compliance responsibilities when I added payroll to my expenses. Here is the guide I wish I had found years ago.
Texas is a great state to have employees. There is no state income tax withholding required because we have no state income tax. Hooray! God Bless Texas! There are three major filing obligations in Texas. One, when any new employee is added to your payroll, you must report information about the new hire within 20 days of the hire date. The form is found https://portal.cs.oag.state.tx.us/wps/portal/employer.
Second, the employer must file an annual report with the Texas Department of Insurance between February 1 and April 30 each year declaring whether or not the employer subscribes to workers compensation. Here is their website https://www.tdi.texas.gov/forms/form20numeric.html.
Lastly, all employers must pay into state unemployment (called SUTA). SUTA reports are due quarterly. You first need to create an account with the Texas Workforce Commission (TWC). TWC will set your tax rate. The reports are due at the end of the month following the end of the quarter. Note that you do not pay SUTA with your report. I suggest filing your report then logging back in a few days later to find out how much you owe. Here is their website https://www.twc.texas.gov/businesses.
If you are a Texas company but you have employees working outside of Texas (say working remotely) you will likely have filing and paying responsibilities in other states. If the employee is in a state with an income tax, you will also be responsible for withholding income tax in that state.
The first day an employee is hired your will to gather a few documents. First, the employee must fill out a W-4 https://apps.irs.gov/app/picklist/list/formsPublications.html?value=w-4&criteria=formNumber. The employer does not have a due diligence responsibility with W-4s, but the employer should ensure that their social security number is correct. W-4s are not submitted to the federal government but are used solely to determine withholding. Social security number verification can be done through Social Security Administration verification https://www.ssa.gov/employer/ssnv.htm.
Second, the employee must fill out form I-9 for the Department of Homeland Security available https://www.uscis.gov/i-9. The I-9 also requires copies of employee identification such as driver’s license and social security card. The I-9 is not submitted to the federal government but must be held for three years after employment ends.
The largest part of employee compliance relates to federal tax withholding. The first step, if you have not already done so, is to obtain an EIN from the IRS. The IRS does not require businesses to obtain an EIN UNLESS the business has employees. The application can be found https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online. Unlike anything else involving the IRS, obtaining an EIN is quick and painless.
After you obtain an EIN, you have a decision to make. Do you want to use a payroll software such as ADP, Quickbooks, Gusto, etc.? There are many software programs. The first year we had employees, we did not use software but did everything with excel. It is possible without a program but quite painful. We currently use Gusto, and it is fairly affordable and user friendly. https://gusto.com/
There are two pieces to federal tax compliance. The first involves remitting withholding and paying employer payroll taxes on a monthly/semi-weekly basis. How often you make payments depends on how much is being paid. See https://www.irs.gov/forms-pubs/about-publication-15 for the rules on how often taxes must be deposited. The payments MUST be made through EFTPS. I recommend allowing time for your EFTPS account to be activated. The IRS must mail you a pin in the mail https://www.eftps.gov/eftps/.
Withholding amounts can be calculated with an excel spreadsheet. The IRS publishes an excel spreadsheet to help calculate INCOME tax withholding https://www.irs.gov/businesses/small-businesses-self-employed/income-tax-withholding-assistant-for-employers. Note that this spreadsheet only covers INCOME tax withholding. Withholding also includes payroll taxes.
There are two sides for payroll tax: employee and employer. Employee is 7.65% and employer is 7.65% for tax year 2022. There are some exceptions that can increase or decrease this amount. Payroll for both employer and employee and income tax withholding are all submitted in bulk through EFTPS.
It is very important that your internal spreadsheet tracks how much is withheld for each employee for both payroll and income tax and how much is paid by the employer. You will need information from that spreadsheet to prepare the second piece of federal tax compliance: quarterly reports.
Quarterly/annual reporting can be a little complicated. If you do not subscribe to payroll software that prepares these reports, you may want to consider hiring a professional for the first year. It can be daunting. The first report is form 941. Form 941 accumulates all the payments made to EFTPS during the quarter. Form 941 is due the last day of the month following the end of the quarter.
Form 940 is an annual report due on January 31 for federal unemployment tax. Although Form 940 covers a calendar year, you may have to deposit your FUTA tax before you file your return. If your FUTA tax liability is more than $500 for the calendar year, you must deposit at least one quarterly payment. Deposits are made through EFTPS. In my opinion, Form 940 is vastly more confusing than Form 941.
As you may recall from above, state unemployment is also paid, but is a credit against federal unemployment. Therefore, I suggest filing and paying state unemployment first, then moving to federal. https://www.irs.gov/taxtopics/tc759#:~:text=The%20due%20date%20for%20filing,on%20the%20next%20business%20day.
The last tax report that most employers file is not with the IRS but the Social Security Administration. By January 31, employers must file copies of W-2s given to employees and a W-3 (cumulates all W-2s) with the SSA. This can be done digitally, but you must create an account with the SSA. https://www.ssa.gov/employer/ It is pretty easy to do, and if you get confused, the SSA will actually answer the phone.
If you hire a payroll software provider, they will make your EFTPS deposits and state unemployment deposits for you on your behalf. Some providers will also file your quarterly and annual reports. I highly suggest paying extra for a provider that files the reports. Most of these providers will also charge you extra to prepare reports for your independent contractors. This is a waste of money.
Reporting for independent contractors is very simple as there is no withholding. The only requirement for independent contractors is a 1099 at year end. You must file a copy of the 1099 and Form 1096 (which cumulates 1099s) by January 31. Just remember to track how much you pay each independent contractor during the year and request a W-9.
If you are a larger company, there are likely additional reports that must be filed. In addition, your specific line of work may have licensing compliance requirements for new employees.
I hope this was helpful. If you need assistance forming your business or have any questions with business as usual, give us a call at 903-871-1714.