Own a small business? Then you may want to move to the Lone Star State.
Meaningful tax incentives and a low cost of living makes it easier for Texas business owners to keep more of the money they earn. In fact, Texas usually gets an A+ for its “overall friendliness” to small business owners.
So how does that friendliness translate to the cost of hiring an employee?
In Texas, and every other state, there’s more than just the cost of the salary to consider. On top of the employee’s actual salary, you’re also in charge of paying payroll-related taxes. Plus, you have to pay to recruit and train your employee—and provide benefits like health insurance. For now, though, let’s focus on the bare minimum: wages or salary and the associated taxes that you have to pay as an employer.
Here’s a handy infographic to help you visualize the estimated cost of hiring an employee in Texas:
Now we’ll expand on each of these scenarios:
- Leo: Leo is a pilates instructor in Austin and earns $25 an hour. He usually works around 10 hours a week. His employer pays a smaller amount of wages, $13,000; however, the taxes of $1,280 make up a more significant portion of the total cost to hire than the other examples. Ultimately, the wages make up about 91 percent of the total cost to hire, while the taxes make up about 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, while the 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 95.5 percent of her total cost to hire, while taxes are around 4.5 percent of the total.
Right away, you’ll probably notice that as the salary or wages goes up, they become a higher percentage of the total cost to hire. This happens because most of the taxes have relatively low “ceilings” or maximums.
As of February 2019, the Federal Unemployment Tax Act (FUTA) and Texas State Unemployment Tax Act (SUTA) are only applied 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 more significant. For Social Security, employers are responsible for 6.2 percent on the first $132,900 of an employee’s wages, a maximum of $8,239.80. 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. Anyone earning more than those thresholds will pay an additional 0.9 percent Medicare tax.
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 break down as of February 2019. Remember that these numbers change, so always check with a tax professional to get the most up-to-date amounts.
- Social Security: Social Security is a federal insurance program that provides benefits to retired employees and the disabled. Employers must pay 6.2 percent of taxable wages on the first $132,900. In some places, you might see this referred to as “FICA” or the “Federal Insurance Contributions Act,” and that refers to the combination of Social Security and Medicare.
- Medicare: Medicare is a federal system of health insurance for people over 65 and younger people with disabilities. Employers must pay 1.45 percent on 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 in 2019 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 provides benefits to unemployed workers, the disabled, and those on paid family leave. The Texas SUTA rate is 0.46-6.46 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 amount of unemployment benefits that have been charged to your account, as well as other factors. Because it varies for each business, we’ve used the standard rate assigned to new employers in our calculations above.
Other factors that go into the final cost.
There’s more you may have to pay beyond your employer taxes and your employee’s salary or wages. There’s also the price of recruiting a new employee, like sponsoring job postings, along with other parts of your compensation package, like health insurance, 401(k) matching, and other benefits.
In a state like Texas, lots of variables have to 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.