Unlike the large majority of other states, Texas does not have a personal income tax. Therefore, if you have a small business with employees who work in Texas, you won’t need to withhold state income tax on their wages. However, you will still need to withhold federal income tax for those employees. Here are the most basic points for withholding employees’ federal income tax.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
All new employees for your business must complete a federal Form W-4. You can download blank W-4s from the IRS. You should keep the completed forms on file at your business and update them as necessary.
The IRS has two primary payment schedules for withholding taxes: monthly or semiweekly. There is also an annual payment schedule that applies to employers with low annual amounts of withholding ($1000 or less). The IRS will specifically inform you if you will be on an annual payment schedule. In addition, in rare cases where an employer withholds very large amounts of tax, there is a next-day payment requirement, which is not covered here.
In general, your payment schedule will depend on the average amount you withhold from employee wages. The more you withhold, the more frequently you’ll need to make withholding tax payments. New employers start on a monthly payment schedule (unless, because of very low withholding, they qualify to pay annually). After you’ve been an employer for enough time, your schedule will be based on the amount you’ve withheld in the past (during a so-called lookback period).
The exact threshold dollar amounts for the different payment schedules, as well as other rules, can change over time, so you should check with the IRS at least once a year for the latest information.
Due dates for the various payment schedules are as follows:
If payment is due on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. All payments must be made electronically via electronic funds transfer (EFT).
For more information on making payments, including calculating how much to withhold, check the current version of IRS Publication 15, (Circular E), Employer's Tax Guide. The guide is updated every year. You can download a copy from the IRS.
Apart from making scheduled tax payments, businesses also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. Use Form 941, Employer’s Quarterly Federal Tax Return. Include a Form 941-V, Payment Voucher, if you are including a payment with the return and are not otherwise required to make payments electronically. As mentioned above, businesses with very low annual withholding tax liability ($1,000 or less) may file annually instead of quarterly, using a single Form 944,Employer’s Annual Federal Tax Return.
Quarterly returns are due on or before the last day of the month following the close of the quarter:
Form 944, the annual return, is due by January 31st.
As with tax payments, any return due date that falls on a Saturday, Sunday, or legal holiday is adjusted to the next business day.
After the end of the year, you must provide each employee with a Form W-2, Wage and Tax Statement, which summarizes the employee’s wages and withheld taxes for the past year. The due date for providing W-2s to employees is January 31st. You also must file Form W-3, Transmittal of Wage and Tax Statements, with the IRS. Form W-3 summarizes the total employee taxes you’ve withheld during the year. You should attach copies of the W-2s sent to all of your employees to your Form W-3. Large employers are required to submit W-2s electronically. Smaller employers file W-2s electronically or on paper. In addition, the W-3 can be filed electronically. There are two free e-filing options, both available through the Social Security Administration’s Business Services Online(BSO): W-2 Online and File Upload.
Form W-3 with Forms W-2 must be filed or before the last day of February. As with tax payments, any return due date that falls on a Saturday, Sunday, or legal holiday is adjusted to the next business day.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that under federal law, the employer remains responsible if an outside company fails to perform any required action. Search “outsourcing payroll duties” on the IRS website for more information.
While there is no state withholding tax in Texas, employers do need to pay state unemployment insurance taxes.
This article touches on only the most basic elements of federal employee withholding taxes for Texas businesses. Avoid possible penalties for making mistakes by checking the IRS website for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.