Payroll taxes: Cost of hiring an hourly worker in Texas in 2020

Disclaimer: The information provided in this article is for informational purposes only and does not constitute legal advice.‍

As someone who owns a business in Texas, if you are planning to hire a new hourly worker, it can have a significant effect on your finances. It's true that your new hire will help you make money and bring skills to the table that will help you. However, you need to carefully calculate whether you can afford to pay their wages as well as the other costs associated with them. Along with the person's wages, you are also responsible for paying their payroll-related taxes, benefits, and the miscellaneous costs of recruiting and training them. Payroll related taxes can be confusing- some taxes are deducted from a worker’s wages, whereas other taxes are charged directly to the employer. In this article, we have clarified these taxes, while classifying state and federal taxes that you and your workers owe.

Taxes paid for by the employer

1.Texas Unemployment Tax

‍Category: TX State Tax

Texas SUTA (State Unemployment Tax Act) is 0.31-6.31% on the first $9,000 of a worker's wages, and a ceiling to this tax is set at 6.31 percent or $434 per employee per year.

‍2. Social Security Tax

‍Category: Federal Tax

This tax is split between the business owner and the worker. Businesses are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.

‍3. Medicare Tax

‍Category: Federal Tax

This tax is split between the business owner and the worker. Businesses are charged 1.45 percent of the workers’ wages.

‍4. Federal Unemployment Tax

‍Category: Federal Tax

After accounting for federal tax credits, 0.6 percent of effective federal unemployment tax is levied on the first $7,000 that you pay your workers as their taxable compensation.

Taxes paid for by the employee (withheld from wages)

1. Social Security Tax

‍Category: Federal Tax

This tax is split between the business owner and the worker. Workers are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.

‍2. Medicare‍

Category: Federal taxThis tax is split between the business owner and the worker. Workers are charged 1.45 percent of their compensation.

‍3. Additional Medicare Tax

‍Category: Federal tax

Workers who make more than a certain income amount (varies by filing status) are subject to an additional medicare tax of 0.9%. Employers are expected to withhold this tax from the workers' wages, if they exceed $200,000 per year.

‍4. Federal Income Tax

‍Category: Federal tax

The federal income tax is determined by splitting a worker's taxable income into separate portions or 'tax brackets'. Each portion is taxed at the rate that corresponds to it. Currently, this rate ranges from 10% to 37% of one's income.

Details

A . Texas unemployment insurance

If a worker loses their employment through no fault of their own, for example, due to a layoff, they receive cash through their unemployment insurance. The unemployment insurance gives them an income until they find a new job again.Texas SUTA (State Unemployment Tax Act) is 0.31-6.31% on the first $9,000 of a worker's wages. A ceiling to this tax is set at 6.31 percent or $434 per employee per year. Because of this, after a point, the percentage of unemployment insurance tax you would owe on a worker's wages would go on decreasing as their yearly wages increases. This tax is reviewed every year.This rate is determined by Texas and can vary based on the year your organization was established. The rate also varies based on a few other factors, including the number of people that work for you and the unemployment benefits that were charged to your account.

B. Social Security

This federal insurance program is aimed at providing a pension to retired and disabled workers. The Social Security tax pays for the retirement, disability, and survivorship benefits that millions of Americans receive each year under the Old-Age, Survivors, and Disability Insurance (OASDI) Program—the official name for Social Security in the U.S. Businesses as well as workers are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.

C. Medicare

Medicare is a health insurance run by the federal government, meant for people over 65 years of age, and people with disabilities, regardless of their age. Business owners as well as workers owe 1.45 percent of a worker's compensation.Social Security and Medicare together are also referred to as Federal Insurance Contributions Act or FICA for short.

D. Additional Medicare Tax

Workers who make more than a certain income amount (varies by filing status) are subject to an additional medicare tax of 0.9%. Employers are expected to withhold this tax from the workers' wages, if they exceed $200,000 per year, irrespective of the worker’s filing status, or income from another source. It is possible that the worker ends up owing more amount than was withheld by the employer, depending on factors such as their filing status and additional income. In that case, the worker should make estimated tax payments and/or request additional income tax withholding using Form W-4.

E. Federal Unemployment

This tax is also referred to as Federal Unemployment Tax Act, or FUTA for short. The Department of Labor, which is a federal division, oversees state programs that provide unemployment benefits to people who are let go from, or have lost their jobs due to events beyond their control. They must also meet certain other requirements to be eligible for unemployment benefits. After accounting for federal tax credits, 0.6 percent of effective federal unemployment tax is levied on the first $7,000 that you pay your workers as their taxable compensation. (Non-taxable income including parking reimbursements, travelling allowance and other payments do not levy any FUTA.)

F. Federal Income Tax

The federal government levies an income tax on workers' wages, and the funds collected from this tax are used to pay for national programs, including the national defense, veterans and foreign affairs, social programs, physical, human, and community development, law enforcement, and to pay off the interest on USA's debt. The federal income tax is determined by splitting a worker's taxable income into separate portions or 'tax brackets'. Each portion is taxed at the rate that corresponds to it. Let's say a worker made $40,000 in the entire year, and they are a single tax filer. For the year 2020, they will be charged a 10% federal income tax on the first $9,875 they make, whereas 12% on the rest of their income. Because of the way tax brackets work, the federal income tax is easy to determine for exempt employees who make a fixed income during the financial year, regardless of the number of hours they work. However, things start getting tricky when it comes to hourly workers. Currently, this rate ranges from 10% to 37% of one's income.