Spec notes
- Under the Texas Labor Code, a business becomes an employer for unemployment tax if it pays wages of $1,500 or more in a calendar quarter, or employs someone during 20 or more weeks of a year.
- Texas unemployment tax applies only to the first $9,000 of each employee’s wages in a calendar year.
- Every U.S. employer must complete Form I-9 to verify each new hire’s identity and authorization to work.
Hiring the first person is a milestone for any Austin startup, and a paperwork moment. Federal law requires certain forms and tax withholding, and Texas adds unemployment tax and new-hire reporting. Texas has no state income tax, which simplifies payroll, but the remaining steps are not optional. Here is a checklist built from IRS guidance and the Texas statutes.
Before the first day
- Get an EIN if you don’t have one; the IRS requires it for businesses with employees. See Getting an EIN for Your Austin Business: Free, Online and in the Right Order.
- Decide employee or contractor. Classification depends on the real working relationship, not on what you call it. The IRS publishes guidance on the difference; when in doubt, ask a tax professional.
- Set up payroll, either yourself or through a payroll provider, so you can withhold, deposit and report taxes on schedule.
Federal forms for each new hire
| Form | What it does | Source |
|---|---|---|
| Form I-9 | Verifies the employee’s identity and authorization to work in the U.S.; every U.S. employer must complete one for each new hire | IRS hiring guidance (form from USCIS) |
| Form W-4 | Tells you how much federal income tax to withhold; ask each new employee for a signed W-4 when they start | IRS |
| Name and SSN | You must get each employee’s name and Social Security number and enter them on Form W-2 | IRS |
| Form W-2 | Annual wage and tax statement you give each employee and file | IRS |
The IRS notes that a W-4 stays in effect until the employee gives you a new one, and that an employee can use it to claim exemption from withholding only by indicating exempt, renewed each year.
Federal payroll taxes
The IRS explains that employers generally must withhold federal income tax from employees’ wages using each W-4, and withhold and pay Social Security and Medicare taxes; current rates and the wage base are in Publication 15 (Circular E), the Employer’s Tax Guide. Federal unemployment (FUTA) tax is separate: the employer pays it from its own funds, it is not withheld from pay, and it is reported on Form 940. Deposit schedules vary by business, and payments can be made free through the government’s Electronic Federal Tax Payment System (EFTPS).
Tip: Put payroll tax deposit dates on the calendar before the first paycheck. Late deposits bring penalties that add up quickly for a small company.
Texas unemployment tax
Texas funds unemployment benefits through employer contributions under the Texas Unemployment Compensation Act. Section 201.021 of the Labor Code says an employing unit becomes an “employer” if it:
- paid wages of $1,500 or more during a calendar quarter in the current or preceding calendar year; or
- employed at least one individual for some portion of a day in 20 or more different calendar weeks of the current or preceding year.
How much
Two numbers in the Labor Code matter for a new employer. Under section 201.082, the tax applies only to the first $9,000 of wages paid to each employee in a calendar year. Under section 204.006, a new employer’s initial contribution rate is the greater of the rate set for its industry group less one-tenth of one percent, or 2.6 percent, until the employer has enough history for an experience rate. The Texas Workforce Commission administers the tax and notifies employers of their rates.
New-hire reporting
Texas Family Code section 234.102 requires employers in the state to report each newly hired or rehired employee to the state directory of new hires, which the state’s child support (Title IV-D) agency operates in cooperation with the Texas Workforce Commission, in line with federal law. Payroll providers often handle this report, but the duty is yours.
Employee or contractor?
Founders often start with contractors. The IRS says you must first know the business relationship, and that all evidence of control and independence counts. It groups the facts into three categories: behavioral (does the company control what the worker does and how), financial (how the worker is paid, whether expenses are reimbursed, who provides tools) and the type of relationship (written contracts, benefits, whether the work is ongoing and key to the business). Look at the whole relationship and document how you decided. Contractor payments also do not count as compensation for the Texas franchise tax compensation deduction, according to the Comptroller; see The Texas Franchise Tax for Startups: Who Files, Who Pays and When.
Owners are different
If you are a sole proprietor, you are not your own employee. The IRS generally taxes your net earnings through self-employment tax, 15.3 percent for Social Security and Medicare. LLC and corporate owners face different rules depending on how the entity is taxed; see Choosing a Business Structure in Texas: Sole Proprietorship, LLC or Corporation.
Help with hiring
The City of Austin’s free BizAid orientation and coaching cover business management basics, and coaches can help you plan for growth. See Free and Low-Cost Help for Austin Founders: City, County and Library Resources.
The bottom line
Before the first paycheck: EIN, I-9, W-4, a payroll setup and a calendar of deposits. In Texas, add unemployment tax registration once you meet the $1,500-a-quarter or 20-week test, and report every new hire to the state directory. Done right from the start, it stays simple.