Payroll for Texas Small Businesses: What You Need to Know Before You Hire

Hiring your first employee is a milestone worth celebrating. It also triggers a series of new obligations that a lot of business owners in Plano, Lewisville, and across North Dallas are not fully prepared for. Setting up payroll correctly from day one is far easier than fixing payroll problems after the fact.

Get an Employer Identification Number

Before you can run payroll, you need a federal Employer Identification Number from the IRS. If you have been operating as a sole proprietor using your Social Security number, hiring an employee requires you to obtain an EIN. This is a free application you complete directly with the IRS, and you can typically receive your number the same day.

Register With the Texas Workforce Commission

Texas employers are required to register with the Texas Workforce Commission for state unemployment insurance purposes. You will file quarterly unemployment tax reports and pay state unemployment taxes on your employees' wages. The TWC will assign you a tax rate based on your industry and claims history.

Set Up Federal Payroll Tax Withholding

Every paycheck you issue requires you to withhold federal income tax, Social Security tax, and Medicare tax from the employee's gross wages. As the employer, you also pay a matching share of Social Security and Medicare taxes. These withheld amounts must be deposited with the IRS on a schedule determined by your payroll size. Most small employers deposit monthly or semi-weekly.

File the Required Quarterly and Annual Returns

Every quarter, you file Form 941, which reports your payroll tax obligations, the taxes withheld, and the deposits you made. At year-end, you file Form 940 for federal unemployment tax and provide each employee with a W-2 by January 31. State unemployment returns are filed quarterly with the Texas Workforce Commission.

Employee vs. Independent Contractor: Get This Right

One of the most consequential decisions you will make is whether the person working for you is an employee or an independent contractor. The IRS and the Texas Workforce Commission have specific criteria for making this determination, and misclassifying employees as contractors is one of the most common and costly payroll mistakes. If the IRS determines that someone you treated as a contractor was actually an employee, you can owe back payroll taxes, penalties, and interest going back several years.