Are you a small business owner? Then you may want to move to the state of Texas.
Meaningful tax incentives and a low cost of living make it easier for Texas business owners to keep more of the money they earn. With that in mind, it’s unsurprising that 99.8 percent of businesses in Texas are small businesses with less than 500 employees.
So how does that friendliness translate to the cost of hiring an employee?
In Texas, and every other state, the cost of the hiring process is more than adding another paycheck to your payroll. On top of the new hire’s annual salary, you’re also responsible for payroll-related taxes, unemployment insurance, and workers’ compensation insurance. You’ll also pay for recruiting, onboarding, and training your employees. And you may provide benefits like health insurance and employee perks that should also be accounted for.
For now, though, let’s focus on the bare minimum: wages or salary and the associated taxes you must pay as an employer. Here are a few scenarios to illustrate the estimated employer cost of hiring a full-time or part-time employee in Texas:
- Leo: Leo is a Pilates instructor in Austin with an hourly rate, and earns $25 an hour. He usually works around 10 hours a week. His employer pays $13,000 in wages; however, the taxes make up a more significant portion of the $14,279.50 in total cost to hire than the other examples. Ultimately, the wages make up about 91 percent of the total cost to hire, while the $1,279.50 in taxes make up nearly 9 percent.
- Sienna: Sienna is a San Antonio-based graphic designer who earns $65,000 a year. Her salary makes up 92.5 percent of the total cost to hire that equals $70,257.50, while the $5,257.50 in taxes represent about 7.5 percent of the total.
- Marisol: Marisol works at a boutique law firm in Dallas. She earns $250,000 a year. Her salary makes up around 94.5 percent of her total cost to hire that amounts to $264,363.20, while the $14,363.20 in taxes are nearly 5.5 percent of the total.
You’ll probably notice that as the salary or wages increase, they become a higher percentage of the total hiring cost. This happens because most of the taxes have relatively low “ceilings” or maximums.
The Federal Unemployment Tax Act (FUTA) and Texas State Unemployment Tax Act (SUTA) only apply to the first $7,000 and $9,000 of an employee’s wages, respectively. That means you’ll have to pay the same taxes for each employee who is earning at least those amounts.
Contrast that with the Social Security and Medicare taxes, which are far greater. For Social Security, employers are responsible for 6.2 percent of the first $168,600 of an employee’s wages, a maximum of $10,453.20. Medicare has no ceiling at all. Employers pay 1.45 percent on all of an employee’s wages, up to $200,000 for single taxpayers and $250,000 for married folks filing jointly (or $125,000 each for those who are married, filing separately).
Anyone earning more than those thresholds will pay an additional 0.9 percent Medicare tax on the income that exceeds the thresholds. Employers will withhold that amount beyond $200,000 in wages, but the entire amount comes out of the employee’s wages and employers do not pay any part of it, which is why it wasn’t included in the applicable above scenario when calculating total cost to hire.
The main taxes employers have to pay in Texas
Just in case you’re not familiar with all the taxes employers are on the hook for, here’s a quick look at how the payroll tax rates for Texas employers currently break down. Remember that these numbers can change, so always check with a tax professional for the most up-to-date amounts:
- Social Security is a federal insurance program that benefits retired employees and the disabled. Employers must pay 6.2 percent of taxable wages on the first $168,600, which is the maximum wage that can be taxed for earnings in 2024. In some places, you might see this referred to as “FICA” or the “Federal Insurance Contributions Act,” which refers to the combination of Social Security taxes and Medicare.
- Medicare is a federal health insurance system for people over 65 and younger people with disabilities. Employers must pay 1.45 percent of all of an employee’s wages.
- Federal unemployment: The Department of Labor oversees state programs that provide unemployment benefits to workers who become unemployed because of an incident out of their control (like a location closing) and meet certain other eligibility requirements. FUTA is 6 percent on the first $7,000 of an employee’s wages. However, most Texas employers are expected to pay 0.6 percent because they pay state unemployment, too, which earns them a 5.4 percent credit against their FUTA.
- Texas unemployment: A state-sponsored insurance program, Texas SUTA benefits unemployed workers, the disabled, and those on paid family leave. The Texas SUTA rate is 0.25 – 6.25 percent on the first $9,000 of an employee’s wages. This rate is given to you by the state and can be influenced by how long you’ve been in business, the number of employees you have, the number of unemployment benefits charged to your account, and other factors. Because it varies for each business, we’ve used the standard rate (2.7 percent) assigned to new employers in our calculations.
Other factors that go into the final cost
You may have to pay more than employer taxes and employee salaries or wages. The recruitment process to add new team members is also expensive, which includes sponsoring job postings on job boards or social media and paying for background checks. You should also consider added costs to your compensation package, such as employee benefits (e.g., health insurance coverage, 401(k) matching, and disability insurance).
In a state like Texas, many variables must be considered while calculating the total cost of a new employee. But hopefully this breakdown gives you a solid place to start as you build your dream team.
Note: This article is part of a Gusto multistate series on how much it costs to hire employees in various states. Take a look at the California and New York versions to see how Texas compares.
