If your small business has employees working in Texas, you'll need to pay Texas unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In Texas, state UI tax is one of the primary taxes that employers must pay. Unlike most other states, Texas does not have state withholding taxes. However, other important employer taxes, not covered here, include federal UI and withholding taxes.
Different states have different rules and rates for UI taxes. Here are the basic rules for Texas's UI tax.
Note: Texas often refers simply to "unemployment tax" rather than unemployment insurance tax.
In Texas, most for-profit employers are liable for state UI taxes as soon as they have either:
These are effectively the same rules that apply for liability under the Federal Unemployment Tax Act (FUTA). Different rules, not covered here, apply to agricultural (farm) workers, domestic (in-home) workers, and some (but not all) non-profit organizations.
One piece of good news is that state UI tax payments generally can be credited against your FUTA taxes.
As a Texas employer subject to UI tax, your small business must register with the Texas Workforce Commission (TWC) so you can obtain a TWC tax account number. You must register with the TWC within 10 days of becoming liable for UI tax. The TWC prefers that you register online, but you can also register by mail. To register online, go to the Unemployment Tax Registration section of the TWC website. The process should take about twenty minutes. To register by mail, use Form C-1, Status Report. (Farm and ranch employers use a different form.) You can download a blank Form C-1 from the Tax Forms & Instructions section of the TWC website. Once registered, you'll be issued a tax account number. There is no fee to register your business with TWC.
State UI tax is paid on each employee's wages up to a maximum annual amount. That amount is known as the taxable wage base or taxable wage limit. For many years, the limit in Texas has been $9,000. However, that amount could change.
There is also a method for determining the state UI tax rate specifically for new employers. Like the taxable wage limit, the method and associated rates are subject to change. However, currently, the rate is the higher of:
The NAICS was created by the federal government to classify and analyze statistics for different kinds of businesses. Texas, however, uses the average tax rate for each of these kinds of businesses (industries) to assign a UI tax rate to new employers. Established employers are subject to a lower or higher rate than new employers depending on an "experience rating." This means, among other things, the amount of wages your business has paid and whether it has ever had any employees who made claims for state unemployment benefits. In recent years, rates for established employers have ranged from below 1% to above 7% with an average generally below 2%.
In Texas, UI tax reports and payments are due a month after the close of each calendar quarter. In other words, UI tax reports are due by the following dates:
|
For Wages Paid During |
Calendar Quarter Ends |
Due |
Must be Filed & Paid By |
|
Jan, Feb, Mar |
March 31 |
April 1 |
April 30 |
|
Apr, May, Jun |
June 30 |
July 1 |
July 31 |
|
Jul, Aug, Sep |
September 30 |
October 1 |
October 31 |
|
Oct, Nov, Dec |
December 31 |
January 1 |
January 31 |
If the due date for a report or tax payment falls on Saturday, Sunday, or a legal holiday on which TWC offices are closed, reports and payments are considered timely if they are received on or before the following business day.
Unless you have received a hardship waiver from the TWC, you must file your reports and make payments online. A hardship waiver is granted to employers who either:
For additional information about waivers or filing your report or paying your taxes electronically, contact your nearest tax office.
The TWC offers two options for online filing:
Unemployment Tax Services is an online reporting and payment system. QuickFile is a wage reporting program that you can install and use on your own computer. Software is also available through Intuit, a private company, that allows you to upload wage reports based on information in a payroll record.
Larger employers are required to pay by Electronic Funds Transfer (EFT). Other employers generally can pay by any of three methods:
You can make payments online through Unemployment Tax Services or the TEXNET Electronic File Transfer system. Paying by check, money order, or cash is only an option for employer's who have been granted a hardship waiver by the TWC.
You are required to post a notice (poster) regarding state UI claims (as well as Texas payday laws) in a conspicuous place for all employees. The poster provides basic information about who employees should contact at the TWC if they become unemployed, as well as basic information about the Texas Payday Law. You can download a notice from the Posters section of the TWC website that meets all legal requirements.
Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it's important that you do not misclassify an employee as an independent contractor. If you do misclassify an employee, you could be subject to penalties or fines.
You may decide that it's easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Texas UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and TWC websites for the latest information. In addition to state UI tax, employers have other responsibilities not covered in this article such as federal UI and withholding taxes, and required reporting of new hires. You can get more information about many small business tax issues in other articles here on Nolo.com.